DEMOCRACY, TRANSPARENCY AND MONEY LAUNDERING

C O N F I D E N T I A L ULAANBAATAR 000322

SIPDIS

STATE FOR EAP/CM AND INL;
TREASURY FOR MICHAEL HIRSON

E.O. 12958: DECL: 11/06/2019
TAGS: PGOV EFIN SNAR MG
SUBJECT: DEMOCRACY, TRANSPARENCY AND MONEY LAUNDERING

Classified By: Political Officer Dan Rakove, Reasons 1.4 (b) and (d)


1. (C) SUMMARY: Mongolia's Financial Intelligence Unit (FIU)
lacks the capacity to combat money laundering effectively.
The staff of four must assemble, analyze, and maintain the
FIU database of transaction reports as well as ensure
compliance among financial institutions. Interagency
cooperation remains poor, as the FIU--three years old this
month --commands little respect from other justice or law
enforcement agencies. Few are the number of predicate
offenses in the criminal code to which the crime of money
laundering can be applied. Most strikingly, corruption,
bribery and tax evasion are not included despite the
prevalence of these crimes. To date, the FIU has documented
no money laundering, although suspicions are plentiful,
particularly in the mining and banking sectors. Russian
interests have reportedly lobbied against any increased
financial transparency or regulation. The threat of money
laundering will likely grow with the financial inflows tied
with the massive Oyu Tolgoi mining project and other mineral
investments. END SUMMARY.
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Vulnerability
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2. (U) Mongolia is a predominantly cash economy with a large
informal sector. There is a significant underground banking
sector as well, largely to service the hundreds of thousands
of overseas workers sending remittances to Mongolia. The
formal commercial banking sector is highly fractured, divided
among 16 institutions (including one in conservatorship).
Together these factors make Mongolia highly vulnerable to
money laundering. The limiting factor has been the country's
meager $5 billion GDP.

3. (C) Suspicions abound but there is little concrete
evidence of money laundering. What is certain is that the
economy is set to expand rapidly with the conclusion of the
massive Oyu Tolgoi contract with Western firms to mine copper
and gold in the South Gobi and the impending negotiation of
several other mineral resources. As the scale of the economy
in turn increases, so too will the potential for money
laundering. Given the poor legal framework in place,
Mongolia is a tempting ground for organized crime.

4. (C) Currently, much of Mongolia's gold ) subject to a
high windfall profits tax ) is smuggled into China. As a
result, producers devise alternate ways to repatriate the
un-taxed profits. Amounts remain unclear, but contacts
suggest that four to six metric tons of gold are smuggled
annually to evade the windfall profits tax (scheduled to
sunset in 2011). This would potentially create some $140
million to $210 million for smugglers to repatriate.
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Financial Reporting Standards and Practices
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5. (C) U.S. Treasury specialist for East Asia Michael Hirson
and poloff met with Tumurbat, head of the FIU on September

29. Tumurbat stated that his four staff are unable to
collect thoroughly and analyze Cash Transaction Reports (CTR)
and Suspicious Transaction Reports (STR) while insuring
financial institution compliance with the Anti-Money
Laundering (AML) statute. CTRs are filed by financial
institutions for each transaction exceeding MNT 2 million
(approximately $1,500). The Asian Development Bank
criticized this threshold as being set too high, and fail to
capture the large flows of funds. The number of CTRs and
STRs seem too few; the FIU received 150,000 CTRs a year. Only
60 STRs were filed with the FIU from February 2008 through
September 2009. More troubling, STRs are not required for
any type of non-cash transaction.

6. (C) Cooperation by banks seems to be improving. Larger
banks were noted as reliably providing intelligence in accord
with AML guidelines. Nonetheless, the compliance officer
turnover is rapid; employees reportedly move on within three
to six months. Inexperienced compliance officers often fail
to report transactions qualifying of FIU notification. When
banks fail to cooperate out of either ignorance of
regulations or alternatively out of negligence, the FIU is
empowered to send rectification letters, apply penalties, and
ultimately submit the institution to the Central Bank for
license revocation.

7. (C) Non-bank financial institutions (NBFI) process an
estimated 20 percent of all transactions. However, none had
submitted any CTRs or STRs to date. NBFIs include credit
institutions, insurance brokers and securities dealers. NGOs
do not submit reports to the FIU either.
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Interagency and International Cooperation
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8. (C) The Mongolian Customs General Administration (MCGA)
and other law enforcement agencies all nominally report to
the FIU through the General Intelligence Agency-administered
National Coordination Council. Nonetheless, Tumurbat
reported receiving little in useful intelligence from these
agencies. Statutory requirements of law enforcement are
unclear, and officers still lack basic knowledge of AML. Top
officials, including Police Colonel Enkhtur, Head of the
State Investigation Department, told us October 29 that
criminal groups are not engaging in money laundering.
Director of the Enforcement and Intelligence Division at the
MCGA Dovchinsuren echoed these remarks on October 30 in
relation to inflows of non-Mongolian funds. The only
suspicion he voiced was in regard to investments in the
mining and banking sectors from Russia and China. New mining
and mining related contracts will likely multiply in the near
future, following the successful negotiations surrounding the
massive Oyu Tolgoi mine.

9. (U) Mongolia is a member of the Egmont Group of Financial
Intelligence Units as well as the Asia/Pacific Group on Money
Laundering (APG). The FIU draws upon lists of individuals
provided by the Bank of Mongolia, the U.S. Treasury Office of
Foreign Assets Control, and the UN. In addition, the FIU
holds MOUs regarding information sharing with counterpart
units in Afghanistan, China, Russia and Turkey. They have
sent requests to other nations for similar arrangements. The
FIU consults with the APG and the Asian Development Bank on
money laundering issues, and currently receives funding on
these issues only from the World Bank. The Treasury
Department's Office of Technical Assistance previously sent a
team to provide training to and enhance coordination among
law enforcement, judges and the FIU. Tumurbat himself is a
Colorado University graduate who participated in the
International Visitor Program in April 2008.
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Interest Groups and Legal Limitations
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10. (SBU) In the September meeting, Tumurbat expressed
optimism that his staff would increase from four to seven by
year's end, and that the AML statutory power would be
strengthened. However, in a November 4 discussion he told us
that actually only one more analyst would be hired. As of
now, the Criminal Code contains only five predicate offenses
or crimes in the context of which money laundering charges
can be filed: trafficking in drugs, people or illegal arms,
as well as counterfeiting currency and terrorist financing.
Of these, trafficking in persons and drugs reflect recent,
documented threats. Even in the case where such crimes are
committed, however, the FIU lacks authority in the Criminal
Code to freeze or confiscate assets. The Civil Code is more
comprehensive, making predicate offenses of all (these quote
marks need to be corrected before transmission.) "less grave,
grave and exceptionally grave offences." The only exception
to this sweeping statement in the Civil Code is for tax
evasion.

11. (SBU) Gaps in the criminal and civil codes reflect the
interests of the powerful. Tax evasion is widespread, and to
include it as a predicate offense in the civil code would
threaten many wealthy Mongolians. Political considerations
likely resulted in its removal. Mongolia's criminal code is
inadequate to tackle the problem. Tumurbat reported that the
FIU had submitted to legislators the UN Office on Drugs and
Crime/IMF Model Legislation on Money Laundering and Financing
of Terrorism with 20 predicate offenses. Twenty offenses
entered lawmakers' deliberations; five left. Predicate
offenses such as the following vanished in the process:
participation in organized crime, corruption and bribery,
fraud, insider trading, and market manipulation.

12. (SBU) All of these exemptions are particularly
problematic given the lack of banking transparency
facilitates corruption and bribery. Both of these
improprieties occur with frequency, particularly among public
officials and politicians. Adding FIU support to the
Independent Authority Against Corruption poses a significant
threat to the beneficiaries and providers of kickbacks. Both
the FIU and IAAC are professionally run, and if allied, could
pose a distinct threat to politics as usual. Aside from
corruption, tax evasion, fraud, insider trading and market
manipulation, are all white collar crimes of the wealthy and
influential. Legislators to date have in turn been reluctant
to touch these issues. The omission of a predicate offense
for organized crime may hinder law enforcement efforts in
combating these emergent networks.
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Russia Lobbies for Murkiness
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13. (C) Perhaps more ominously, MFAT Americas Director
Odonjil informed us on October 15 that Russia is lobbying in
strong opposition to financial transparency measures.
Tumurbat reported that of the 16 commercial banks, eight or
nine are heavily invested in by state funds and oligarchs of
their northern neighbor. Knowledge of the genuine beneficial
owner of banks is often unclear. As a result, the FIU will
have difficulty in tracing controlling persons behind
companies reported as a party to suspect transactions.
Foreign depositor identity is similarly opaque due to narrow
Know Your Customer laws. Russian state and private investors
are unlikely to welcome FIU analysts examining their
transactions in connection with an expanded set of predicate
offenses.
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Reform Efforts
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14. (SBU) The government was given notice by the Asia/Pacific
Group on Money Laundering that its criminal code was
deficient in relation to anti-money laundering provisions.
In response, the FIU submitted an amended AML law to the
Ministry of Justice and Home Affairs for review. Tumurbat
reported on November 4 that the Ministry had approved of the
draft law. The revision is reportedly in line with
international standards. The State Great Khural in turn
placed "central bank reform" on its docket for the fall term.
Tumurbat is confident AML reform will be considered before
the end of the year along with other provisions touching on
the Central Bank. Given the significant special interests
involved, the enactment of an AML component is uncertain.
Tumurbat estimated the likelihood of passage at 60 percent.
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Comment
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15. (C) The question of money laundering is as much a
question of financial transparency as it is one of democracy.
It was only one year ago that legislators narrowed the
definition of money laundering in defiance of international
standards. Tumurbat attributed this regression to a "lack of
awareness" among parliamentarians. Equally possible is that
a concert of opposition forces undermined the legislation to
prolong business as usual through tax evasion or politics as
usual through corruption and bribery. Given the interests
arrayed in opposition, upcoming deliberations are not then
simply a matter of creating an effective AML regime to combat
crime. Rather, what is at stake is whether legislators will
push for transparency and conformity with international
standards, or whether they will prioritize their own
re-elections and pocketbooks.
HILL