COSTA RICA: TREASURY CONDUCTS FINANCIAL ENFORCEMENT

UNCLAS SAN JOSE 000277 SENSITIVE SIPDIS DEPT FOR INL/LP KBROWN AND MAHERN; ALSO FOR WHA/CEN, WHA/EPSC:AWONG, AND EEB/ESC/TFS TREASURY FOR SSENICH, CCORREA, AND CGAMBLE E.O. 12958: N/A TAGS: ECON EFIN KCRM PGOV PREL SNAR CS SUBJECT: COSTA RICA: TREASURY CONDUCTS FINANCIAL ENFORCEMENT ASSESSMENT REF: 2008 San Jose 0930 -------------- SUMMARY -------------- ¶1. (U) A three-person team from the Department of Treasury's Office of Technical Assistance (OTA) met with key GOCR officials on financial crimes and enforcement issues from March 23-27. The team arrived, at the request of the Central Bank President, to find an environment ripe for financial crimes due to untaxed and unregulated casinos, legalized prostitution and increased narco-trafficking. The OTA team met with government agencies ranging from financial institutions to law enforcement agencies to customs. ¶2. (SBU) In the near term, OTA can provide workshop-type training to government officials on the challenges of standing-up a legislative and regulatory framework to govern casinos. Later, the visiting team, led by Carlos Correa of OTA, will prepare an assessment which can be used to draft the terms of reference for launching an OTA Financial Enforcement program in Costa Rica. ¶3. (SBU) Though U.S. Treasury funds support the assessment team's current work, funds supporting a Financial Enforcement program in FY 2009 are not available. Thus, Post has proposed using State INL/LP "bridge funding" during FY 2009 and the first quarter of FY 2010 to launch the program and make the best use of reform-minded officials in the current government. Costa Rica often does not qualify for assistance based on strictly socio-economic measures. However, the GOCR has the absorptive capacity and the willingness on this issue -- due to the involvement of the Ministry of Finance (an agency with a track record of success with OTA programs) -- to improve the financial crimes environment in Costa Rica. We strongly believe that this new OTA program is worth the investment, and as soon as possible. END SUMMARY. -------------- PROVIDING THE BROAD PERSPECTIVE -------------- ¶4. (U) In response to a request letter from Costa Rican Central Bank President Francisco de Paula Gutierrez, the U.S. Department of the Treasury authorized an assessment of Costa Rica's systemic vulnerabilities to financial and economic crimes. Carlos Correa (Assistant Director of Economic Crimes),Carl Gamble (Regional Director, Latin America),and Rick Hector (Senior Advisor, Internet & Casino Gaming) met with a wide range of officials in the Costa Rican Government, beginning with the Central Bank President and also including: -- Alberto Dent, President, National Council of Financial System Supervision, CONASSIF; -- Cecila Sancho Calvo, Director of Private Bank Supervision, and Nidia Varela Cordoba, Director - Department of Private Bank Inspection, Superintendency of Financial Entities (SUGEF); -- Juan Jose Flores, Superintendent, and Eddy Rodriguez Cespedes, Assistant Superintendent, Superintendency of Securities(SUGEVAL); -- Ana Lorena Brenes, Procuradora General (similar to a solicitor general),and Tatiana Gutierrez, Solicitor of Public Ethics under the Procuraduria General, Ministry of Justice; -- Jenny Phillips, Vice Minister - Income Administration, Jose Adrian Vargas, Treasurer, Desiderio Soto, Director - Customs, and Carole Quesada Rodriguez, Director - Internal Affairs Unit, Ministry of Finance; -- Marcela Chacon, Vice Minister, Ministry of Public Security; -- Jorge Rojas, General Director, and Francisco Segura, Sub Director, the FBI-equivalent Judicial Investigative Agency (OIJ); -- Marta Acosta, Sub-Controller, Office of the Controller General; -- Andrea Murillo, Director, Office of Technical Assistance and International Relations, Jose Cabrera - Organized Crime Unit Prosecutor, Patricia Cordero - Economics Crime Unit Prosecutor, and Walter Espinoza - Narcotics Unit Prosecutor, Office of the Attorney General; and -- Mauricio Boraschi, Director, and Robert Quiros, Manager - Financial Intelligence Unit, Costa Rican Institute of Drugs (ICD). -------------- - COMPLEX GOCR STRUCTURE COMPLICATES ENFORCEMENT -------------- - ¶5. (U) Embassy San Jose purposely designed a meeting program that delivered a broad panorama of perspectives for the visiting OTA team. In general, Costa Rican governance is characterized by a diffusion of authority and multiplication of control mechanisms, which is relevant to the area of financial crimes. Government structure blurs the familiar Executive-Legislative-Judicial relationship by a number of "autonomous" and "semi-autonomous" institutions reporting to one or more of the three principal branches of government. Two examples make the point: -- the Office of the Controller General reports to the legislative branch but has very specific powers to exercise management control over every internal auditing department in the government; and -- the Judicial Branch houses virtually all criminal investigation work (by OIJ) and all prosecution (Attorney General),although the Executive Branch houses the major financial intelligence in the ICD which is part of the Ministry of the Presidency. -------------- NEAR TERM STEPS: CASINO REGULATION -------------- ¶6. (U) In the near term, the OTA team agreed to provide documents regarding key aspects of casino regulation. However, OTA Advisor Hector cautioned that reference materials only hint, at best, at the enormity of the undertaking to stand-up a regulatory body supported by (1) well-crafted legislation which specifies which ministry/ agency has the authority to enforce gambling law, (2) regulations, and (3) "sub-regulations" or standard operating procedures for gambling enterprises. ¶7. (SBU) Costa Rica is particularly vulnerable to money laundering activities originating in the gaming business since gambling is neither taxed nor regulated in Costa Rica. The standing casino law on the books dates from 1922. OTA is willing to return Hector and his Casino & Gaming Team to Costa Rica for a short training session for the GOCR to learn about the necessity, as advisor Hector described, to "regulate (gambling) all the way" since legislating and regulating the gaming industry is an "all or nothing" proposition. -------------- MEDIUM TERM STEPS: ASSESSMENT TEAM ANALYSIS -------------- ¶8. (SBU) The OTA assessment report will be very useful to Embassy San Jose, as we focus more closely on the key issues associated with financial and economic crimes; the report will detail the vulnerabilities of the Costa Rican financial system to criminal activity. More importantly, the report will recommend the basis for collaboration with the GOCR on a financial enforcement/economic crimes OTA program. Thus, U.S. Treasury and the GOCR can use the report to draft a terms of reference agreement which would serve as the basis for a formal OTA program in Costa Rica. -------------- LONG TERM STEPS: PROPOSED OTA PROGRAMING -------------- ¶9. (U) Once OTA releases its report (with clearances from the Embassy and key officials in the GOCR),Treasury will add Costa Rica to its list of possible projects for support in calendar year 2010 by Treasury International Assistance Technical Agreement (TIATA) funds. However, due to the late timing of the delivery of President Gutierrez's letter (October 2008),Treasury could only provide funds for an assessment team report, not a full program, in FY 2009. If selected, Costa Rica could thus have to wait for at least seven months -- from release of the final report in May to the end of December - before receiving the OTA financial enforcement program. -------------- STATE INL POSSIBILITIES -------------- ¶10. (U) In the interest of starting a program sooner than CY 2010, Embassy San Jose sent INL/LP a proposal outlining a program for "bridge funding," i.e. funds to launch a program in FY 2009 or first quarter of FY 2010. The nature of such an OTA advisory program would be "intermittent," that is one or two advisors would travel to Costa Rica for two weeks once every two months. If the INL support began as early as mid-July 2009, then Post projects a cost of USD 130,000 for six trips (through the end of CY 2010). If program support was restricted to the first quarter of FY 2010, then Post projects a cost of USD 65,000 for three two-week trips. -------------- BRIDGE FUNDING RATIONALE -------------- ¶11. (SBU) The impetus to start a program during FY 2009 or the first quarter of FY 2010 directly relates to the timeline of the Arias Administration. With elections scheduled for February 2010 and a new government taking office on May 1, the current government is likely to lose much of its effectiveness and focus by the end of CY ¶2009. The current leadership in the Ministry of Finance, Ministry of Justice, OIJ and the Costa Rican Drug Institute are committed to reform, but many of the incumbents will change when the new administration takes power in May, 2010. (The leadership of the Central Bank, CONASSIF, SUGEF, SUGEVAL, and the Office of the Controller remain in office past the 2010 elections.) Furthermore, tackling casino legislation and regulation, though daunting, merits starting a Financial Enforcement program as soon as possible since the vulnerabilities to money laundering, which are significantly compounded by growing narco-trafficking activity in Costa Rica (reftel),are wide open; virtually no supervision exists. -------------- COMMENT -------------- ¶12. (SBU) The visit by the OTA team reinforces our continued commitment to start a Treasury OTA Financial Enforcement program in Costa Rica. Economic crime challenges will only grow thanks to Costa Rica's "three-point program on vice": untaxed and unregulated casinos, legalized prostitution, and growing narco-trafficking. (Costa Rica increasingly serves as an intermodal transshipment point for drug trade between South America and North America and Europe). The latter point is compounded by traffickers paying in product, which has produced a local drug addiction problem. Combine these three "vices" with the lax legal environment (e.g., casino legislation from 1922),and opportunities abound for money laundering and terrorist financing. ¶13. (U) Though Costa Rica does not often qualify for USG assistance since it ranks relatively higher than its Central American neighbors on socio-economic measures, it merits assistance in this case because of the capacity of the relevant institutions (the Central Bank and the Ministry of Finance) to absorb USG assistance, apply the benefits, and post demonstrable results. The Ministry of Finance is a case-in-point as it has successfully applied the benefits of OTA programs on tax administration and budget management and continues to do so with debt management. A Financial Enforcement program would encourage inter-ministerial coordination -- vital to pursuit of economic crimes -- and bolster Costa Rica's efforts to significantly improve its security environment. CIANCHETTE