U.S. DEPARTMENT OF STATE
INTERNATIONAL NARCOTICS CONTROL STRATEGY REPORT MARCH 1996:
FINANCIAL CRIMES AND MONEY LAUNDERING

United States Department of State

Bureau for International Narcotics and Law Enforcement Affairs

INCSR 1996 COUNTRY CHAPTERS
Haiti to Italy

Honduras. (Low) The conditions exist for major money laundering activities due to the lack of legal control, but the actual extent of laundering is unknown. It is almost certain that some laundering based on cocaine transit occurs in the non-bank financial system with investments, such as hotels, supermarkets, and real estate used as vehicles for laundering. The recent passage of banking reform legislation strengthened surveillance by banks of potential laundering, and the expected passage of comprehensive money laundering legislation in mid 1996 will significantly aid law enforcement efforts.

Honduras enacted an asset seizure law in 1993 and seized a few trucks in 1994. Additional asset forfeiture legislation is currently pending before congress and is expected to be passed in 1996.

Hong Kong. (High) The colony's well-developed and extensive international financial networks--along with proximity to major drug-producing countries in Asia--make it an attractive base for money-laundering activity. Low taxation rates, simple procedures for company registration, and the absence of controls on the amount of money that can enter and leave the territory adds to Hong Kong's attractiveness to money launderers. Hong Kong government authorities recognize that the territory's reputation as a financial center depends, in part, on its willingness to take effective action against money laundering activities, both drug- related and otherwise. Through amendments to existing legislation, detailed elsewhere in this report, Hong Kong authorities have closed off many loopholes previously exploited by traffickers. In addition, broadened bilateral cooperation on money laundering cases is one of the objectives in negotiating a US-Hong Kong Mutual Legal Assistance Agreement. Finally, Hong Kong has implemented most of the 40 recommendations issued by the Financial Action Task Force aimed at improving the local legal and financial framework for combatting money laundering and for improving international counternarcotics cooperation.

Money laundering is a criminal offense under both the Drug Trafficking (recovery of proceeds) Ordinance (DTTOP) and the Organized and Serious Crimes Ordinance (OSCO). Reporting of suspicious financial transactions to the Joint Financial Intelligence Unit (a joint police and customs and excise department unit) is an explicit legal obligation of financial institutions under the ordinances. No mandatory reporting requirements exist for deposits over a specific amount. Rather, guidelines issued by the Hong Kong monetary authority require institutions to observe specific standards and procedures for record-keeping, customer identification, and pay special attention to all complex, unusually large transactions.

Hong Kong police reported in September 1995 that, in the past two years, the number of suspicious transactions had "shot up 15 times." Records must be kept for six years, and those pertaining to ongoing investigations or that have been subject to disclosure are required to be retained until the pertinent case is closed. In an effort to ensure that banking institutions are prudently managed, Hong Kong's banking ordinance requires Hong Kong monetary authority approval for all chief executives (including alternates) and bank directors of institutions incorporated in Hong Kong.

The operations of remittance centers and other non-bank institutions in the territory are of growing concern, both to the USG and Hong Kong authorities. There is no existing legislation to regulate these non-bank entities--primarily money changers/lenders and pawnbrokers--and there is evidence that drug proceeds are increasingly being channeled through these non-regulated avenues. Hong Kong authorities have identified the creation of a regulatory framework for remittance centers as a high priority in 1996.

Hungary. (Medium) Hungary is neither a major regional financial center nor a tax haven. Money laundering has been illegal since 1994 and banks are required to report significant cash transactions on a regular basis. In light of poor internal banking controls, some money laundering probably occurs, but narcotics traffickers are not particularly active.

Banks and other financial institutions are required to know, record, and report the identity of individuals and companies conducting large, currency, transactions, and to maintain records on such transactions. Data is reported to the ministry of finance. Hungary cooperates with US law enforcement agencies on the financial aspects of narcotics-related crime. Asset forfeiture laws exist but are not applied in practice. Hungary and the USG signed a mutual legal assistance treaty in 1994.

Iceland. (No Priority) Iceland has not ratified the 1988 UN Convention but does have anti-money laundering regulations derived from the European Economic Agreement. Between September and December 1994, a Bahamian-registered company laundered about $10 million through two Icelandic commercial banks. A woman was arrested in Belgium in connection with this scheme, which was not narcotics-related. Authorities attribute the success of the detection and prosecution of this case to Iceland's regulations on money laundering, the small size of its banking system, the novelty of large capital flows, and the Government's desire to maintain Iceland's good name.

India. (Medium-High) Although money laundering is not a criminal offense per se, those suspected of hiding funds can be prosecuted for income tax evasion under the income tax act, with penalties of up to seven years' imprisonment. Under or over-invoicing, two common ways of hiding drug money, are offenses and can be prosecuted under customs law. The NCB has set up a committee to look into drafting specific money-laundering legislation, but to date, no proposals have gone forward. Anyone establishing a bank account must provide a photograph, and transactions over rs 50,000 (usd 1,470) cannot be made in cash. All transactions over rs 100,000 (usd 2,940) must be reported to bank management, which then decides whether to notify the authorities.

The GOI has issued administrative instructions to financial institutions to report suspicious transactions, but they are under no legal obligation to do so. Bankers are protected by law when they cooperate with law enforcement authorities. When requested, India has cooperated with the law enforcement agencies of the USG and other countries. There are controls on the amount of currency which can be brought into or taken out of the country. Foreigners must declare amounts in excess of US$ 10,000; Indians must declare the rupee equivalent of US$ 10,000. The government has not adopted due diligence laws making individual bankers responsible if their institutions launder money.

Under the Narcotic Drugs and Psychotropic Substances Act of 1985, amended in 1989, illegally acquired property can be frozen or forfeit. This law applies only to the assets of those persons actually convicted of crimes, however, which enables those who have been arrested to hide their assets before conviction. The GOI hopes to broaden this act to apply to those who have been arrested or against whom a warrant has been issued. While there are no political obstacles to passing a tougher law, the overlapping jurisdiction of several ministries has slowed the process. Under the act, instruments of crimes such as laboratories are immediately forfeit, although the actual farms on which illegal crops are grown are not forfeit. Any asset which is acquired through illegal proceeds can be forfeit. Legitimate businesses which launder money cannot be seized. The national fund for control of drug abuse receives the proceeds from narcotics-related asset seizures and forfeitures. The courts can forfeit assets if they are an instrument of offense. If the assets are acquired from the proceeds of a crime, a competent authority has the power to forfeit them. Competent authorities include officials of the state police, state drug control agencies, Forest Department, Central Customs, Central Excise, the Central Bureau of Investigation, the Narcotics Control Bureau and the Central Bureau of Narcotics. While these authorities have sufficient powers, resources are inadequate and with the exception of the NCB and CBN, they have other mandates to fulfill as well, which may take priority. 52. As of July 1995, USD 1.3 million of assets were frozen and usd 1.6 million of assets were forfeited, which is an increase from the previous year. The GOI is open to efforts by the US and other countries to trace and seize assets, and they make use of tips from other countries. The GOI has bilateral narcotics agreements with ten other countries, but the focus is not on asset seizure.

National laws do not permit the sharing of forfeited assets with other countries. The banking community has been fairly cooperative; bank secrecy laws are not strict in any case.

Indonesia. (Low) While Indonesia is not a major producer of narcotics or money laundering center, it is increasingly used as a transit point for Southeast Asian heroin, including transhipment to the US, Australia and Europe. As interdiction efforts increase in other countries, use of Indonesia as a transhipment point is expected to escalate. Indonesia's booming economy has created greater links to international markets, including increased air connections to the US and expansion of international shipping. Indonesia's tourism boom has increased the incidence of narcotics trafficking particularly in Bali. Indonesia's criminal code lists a limited number of illicit narcotics and does not include prohibitions. Indonesia has not passed anti-money laundering laws of any kind. It has signed but not ratified the 1988 UN Convention.

Ireland. (Low) Ireland is not a significant financial center, tax haven or offshore banking center and the government is unaware of any systematic money laundering activities. The GOI, as a matter of policy, works to discourage money laundering via significant criminal penalties enacted in the 1994 criminal Justice act. Drug-related money laundering was made a criminal offense under the 1994 Criminal Justice Act which came into effect in May 1995. In the seven months that this legislation has been in effect two cases have been referred for prosecution by the director of public prosecutions. Irish law does not permit sharing of forfeited assets with other governments. The customs service and the national police regularly confiscate conveyances used to transport narcotics, usually cars and trucks. These vehicles are retained by the confiscating agency or used by other government agencies as official vehicles. Ships which have been seized become the property of the Department of Defense and the marine.

Israel. (Medium High) The priority for Israel has been raised to Medium-High, reflecting public statements by senior Israeli officials that Israel is emerging as a more significant money laundering center for Russian criminals. Israeli officials have stated that Israeli organized crime has processed drug proceeds through Israeli financial institutions, in Israel and abroad, using US dollars. Money laundering is not yet a prosecutable crime, and benign banking laws, a policy of not taxing foreign accounts, and a lucrative stock exchange continue to make Israel an attractive investment and financial safe haven. There are no accepted figures on the scope of money laundering in Israel, but there have been estimates suggesting that the amount of funds involved may be substantial. The GOI does not as a matter of policy facilitate or engage in money laundering activities.

Israel has not adopted laws or regulations which ensure the availability of adequate records of narcotics investigations to appropriate personnel of USG or other governments, but Israeli law permits cooperation without a formal treaty. Proposed mutual legal assistance legislation that will go before the Knesset in early 1996 will allow for comprehensive reciprocal legal assistance with competent foreign authorities regarding asset forfeiture investigations, the provision of material evidence and witnesses for forfeiture proceedings, the attainment of temporary injunctions or restraining orders vis-a- vis property, and the implementation of forfeiture orders. The 1995 dual taxation treaty between the United States and Israel grants US tax authorities limited access to bank account information. A Mutual Legal Assistance Treaty (MLAT) with the USG is under protracted negotiation, but appears stalled over territorial issues and how to treat criminal tax offenses.

The GOI has signed, but not yet ratified, the 1988 UN Convention. According to the foreign ministry, the political will to ratify the accord is there, but some issues -- including Israel's prohibition on extraditing its citizens -- are not yet resolved.

Israel has acceded to the Council of Europe convention on mutual legal assistance in criminal matters. It has narcotics cooperation agreements with Italy and Turkey that cover law enforcement cooperation, though not specifically with regard to money laundering.

Israel's Ministry of Justice completed drafting money laundering legislation in late 1995, and plans to table it before the Knesset in 1996. Under current laws, money laundering is not an independently prosecutable crime; a specific criminal conviction must be obtained before forfeiture proceedings to seize income, property and other "fruit of trafficking" may be instituted. This legal requirement has limited the success of law enforcement agencies in pursuing money laundering cases. Nonetheless, one of the priority objectives of the Israel National Police is to follow up major trafficking convictions with asset-forfeiture proceedings.

Israeli law enforcement agencies have established an interagency commission to further the practical application of this legislation. However, several laws make prosecuting money laundering cases difficult. Banking secrecy laws permit banks to divulge information only after the proper court order has been obtained. Moreover, there are no currency controls on large transactions by non-Israeli citizens. Foreign residents with local accounts, for example, are not required to file Israeli tax returns.

Anticipating new money laundering laws, the INP plans to establish a small 12-person unit in 1996 to receive compulsory cash reports from banks for transactions over USD 10,000. The unit will also receive and process declarations of cash entering and exiting Israel.

An asset forfeiture law, enacted in 1989, allows for the seizure and forfeiture of all financial assets -- present and past, up to 8 years -- of convicted traffickers and their immediate family. The defendant has the burden of proof to show these assets were legally acquired and not the fruit of trafficking. Legitimate businesses that launder money may be included in forfeiture proceedings only if their owners have been convicted on drug trafficking charges. Under current Israeli law, however, a business proven by its owner to have been established with legitimate money may never be forfeited, even if said owner is convicted of drug trafficking offenses.

All court-forfeited assets are centrally administered by a specific office in the ministry of justice, which may make grants of the seized funds to law enforcement agencies.

The law also permits civil forfeiture of assets which were the result of, or instrumental in, the commission of drug trafficking or production. Civil forfeiture does not require a prior criminal conviction.

The government enforces existing drug-related asset seizure and forfeiture legislation, and asset forfeiture has become increasingly frequent over the past year and a half. The 1989 forfeiture law was enacted primarily because of lobbying from law enforcement agencies.

Italy. (High) The financial sector in Italy serves as a significant money laundering center for both narcotics and other illicit funds. The Italian banking and non-banking systems are used by local and South American drug traffickers primarily to launder proceeds from heroin and cocaine drug activities.

The US-Italy Mutual Legal Assistance Treaty provides a mechanism for exchanging evidence in connection with narcotics investigations. Italy and the US are exploring means to implement the now-suspended seizure and forfeiture article of the treaty or to develop alterative mechanisms. Italy has ratified the 1988 UN Convention and is an active participant in the FATF and the EU effort. Italy has numerous bilateral agreements for the exchange of information on money laundering.

Italy's 1994 comprehensive money laundering law is fully consistent with the FATF forty recommendations and the European union money laundering directive. Italy cooperates closely with the US on financial crimes related to narcotics, including in major joint operations such as Green Ice and Universal Gold. In one 1995 case, Italian authorities froze the bank accounts of accused drug trafficker Jose Santacruz-Londono, in connection with a New York trial of his associates.

Italian banks were initially slow to implement all the regulations of the new law but have not publicly fought it. Italian authorities believe implementation of the 1994 law and the success of joint operations with the US (i.e., Dinero, Universal Gold, and Green Ice) have led some drug traffickers to conduct money laundering outside of Italy.

Italy has an established system for identifying, tracing, freezing, seizing and forfeiting narcotics related assets. Italy is committed under the Council of Europe Convention procedures for sharing such assets with other governments. There are no new laws under consideration. Under existing regulations, businesses used for money laundering can be seized and the government has the authority to forfeit such assets. However, criminals have in some cases used family members to shield assets. Proceeds from seizures go to the Italian treasury. The law also allows for civil forfeiture of assets as a precautionary measure separate from a criminal conviction.

In 1995, the GOI seized over $1.5 billion in assets from organized crime and narcotics figures. The GOI cooperates fully with the US and other countries and exploits tips from other governments regarding the flow of drug derived assets. Italy is engaged with other governments in negotiations to harmonize asset tracing and seizure efforts and has laws permitting the sharing of seized assets with other countries. Banks, while not actively resisting, have provided surprisingly few reports of suspicious activities to the government. While traffickers have not taken any retaliatory actions, fear is often cited as a reason why banks -- especially in the south -- have made so few reports to the government.