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Cablegate: Part Two of Four: Results of Financial Systems

VZCZCXYZ0002
RR RUEHWEB

DE RUEHYN #1423/01 2050908
ZNR UUUUU ZZH
R 240908Z JUL 07
FM AMEMBASSY SANAA
TO RUEHC/SECSTATE WASHDC 7661
INFO RUEAWJA/DEPT OF JUSTICE WASHDC
RHEFHLC/DEPT OF HOMELAND SECURITY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHMCSUU/FBI WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC

UNCLAS SANAA 001423

SIPDIS

SIPDIS

STATE FOR S/CT (NOVIS/GALER), INL (BRANDOLINO/RINDLER),
NEA/ARP

E.O. 12958: N/A
TAGS: KTFN KCRM PREL PTER SNAR EFIN YM
SUBJECT: PART TWO OF FOUR: RESULTS OF FINANCIAL SYSTEMS
ASSESSMENT TEAM VISIT TO YEMEN MAR 1-7, 2007

REF: SANAA 1418

1. Summary. A multi-agency Financial Systems Assessment
Team (FSAT) conducted a week-long, in-country evaluation of
Yemen,s capacity to combat money laundering and terrorist
financing, in order to determine its most critical training
and technical assistance needs on March 1-7, 2007. This
second section of the FSAT Team's report focuses on the
ROYG's Anti-Money Laundering Information Unit, the
development of Yemen's financial sector, and the Central Bank
of Yemen. End summary

--------------------------------------
ANTI-MONEY LAUNDERING INFORMATION UNIT
--------------------------------------

2. Law No. 35/2003 created the Anti-Money Laundering
Information Unit (AMLIU) as Yemen,s financial intelligence
unit (FIU). The AMLIU consists of three members: a
chairman, a legal expert and a technical expert for
verifications.

3. The AMLIU is housed within the Central Bank of Yemen
(CBY), and provides the CBY with both financial and
administrative support, including legal and regulatory
personnel. However, the AMLIU claims that it is technically
independent from the Central Bank since it is not required to
report to the CBY. According to its organizational
structure, the AMLIU can share information with, but does not
necessarily report to, the following three entities: the
Central Bank Governor, the National Anti-Money Laundering
Committee (NAMLC), and the Deputy Governor for Banks.

4. The AMLIU receives suspicious transaction reports (STRs)
from banks, money exchangers, insurance companies, stocks and
bonds companies, and financial real estate leasing companies.
STRs are delivered to the AMLIU by a courier, with an
authorized signature required upon receipt. There is no
specified time limit for filing STRs to the AMLIU.

5. The AMLIU received two STRs from financial institutions
in 2005, and three STRs in 2006. In 2007, the AMLIU has so
far forwarded one suspicious case to the Office of Public
Prosecution for suspected money laundering. Once the AMLIU
receives the STR, it reviews all the information and
supporting documentation contained within the report. If
there are any missing data from the STR or supporting
documents, the AMLIU may request additional information
directly from the bank or conduct an onsite visit. The AMLIU
then determines whether the case is of a criminal nature.
The AMLIU forwards criminal cases to the Office of Public
Prosecution for further investigation. The AMLIU itself does
not have an investigative capacity. The AMLIU has one member
with investigative experience, but needs additional
capacity-building training.

6. The AMLIU is divided into three separate divisions:
investigations, analysis and legal monitoring, and
information technology. The investigations division serves
more as a verification function, rather than an investigative
function, and conducts field visits to financial
institutions. The analysis and legal monitoring division
receives and analyzes the STRs, and reports those cases to
the Office of Public Prosecution. The information technology
division collects and compiles all data received into an
electronic database, and shares information with other
government agencies.

7. The AMLIU faces several challenges with its efforts to
combat money laundering and terrorist financing. The general
lack of AML/CTF awareness, as well as formal training in
AML/CTF detection, are its foremost challenges, for which the
AMLIU has requested immediate assistance. Other challenges
that impede the AMLIU,s efforts include: (1) the corruption
and embezzlement of public funds, which they claim are
rampant throughout the country; and (2) terrorist acts
conducted by highly skilled terrorist groups. Another
challenge to the effectiveness of Yemen,s AML/CTF regime is
the high degree of cash being circulated in the informal
banking sector (approximately 60-80% of total funds).

8. The AMLIU is in need of fundamental training and
technical assistance in the following areas: (1) detecting
suspicious activity in financial transactions; (2) analyzing
suspicious transaction reports once they are received; and

(3) creating an electronic database of all STRs and related
information within the AMLIU in order to conduct future link
analysis. As a first step, an analytic exchange with FinCEN
is recommended in the near future in order to provide the
Yemenis with a better understanding of a fully functional
AMLIU, as well as a general overview of AMLIU operations in
each of these specified areas.

-----------------------------------
DEVELOPMENT OF THE FINANCIAL SECTOR
-----------------------------------

9. Yemen,s financial sector is rudimentary as Yemen is
predominantly a cash-based society. Officials insist that
the financial sector is not conducive to money laundering due
to the poor economic factors and the limited capital of
Yemeni banks. However, officials also reported a 35% growth
rate in domestic bank deposits in 2006 compared to a 28.5%
growth rate by Arab and foreign banks operating in country.
Also, reports indicate that Yemen banks, revenues were 360
billion Yemeni Riyals (USD 1.8 billion) in 2006; and deposits
reached 214 Yemeni Riyals (USD 1.1 billion), with capital of
854 Yemeni Riyals (USD 4.3 billion) by year-end 2006.

10. Officials indicated that several initiatives have been
planned in order to attract more of the population into the
formal financial system: deposit insurance on accounts;
direct deposit of ROYG payroll into bank accounts; expansion
of the ATM network; and the offering of Treasury Bills. On
03/06/2007, members of the team accepted an invitation from
the Chairman of the Cooperative & Agricultural Credit Bank
(CAC Bank) to view its state-of-the-art Visa Card operations
facility at the main branch in Sana,a. The bank,s
initiative to expand services to the non-banking community
and promote trust and reliance in electronic payments systems
indicates a degree of financial sophistication and progress.
All of these trends indicate increased penetration by the
financial sector into the cash economy as the banks and
others begin to pursue the non-bank market. It is therefore
critical that anti-money laundering regulations and controls
be implemented at a similar pace to avoid the risk of an
unregulated sector.

Regulatory Framework
--------------------

11. The current AML law established a number of institutions
such as the AMLIU and the National AML Committee, and listed
various money laundering offenses, which do not include
terrorist financing or tax evasion. The AML law levies a
number of regulatory and other requirements on financial
institutions (i.e. banks; money exchanges; and companies -
funding, insurance, securities, financial leasing, and real
estate) although the CBY,s supervision is limited to banks
and money exchanges. Financial institutions are required to
develop formal procedures that address the following:

-- A formal compliance program that includes training,
testing for compliance, and the designation of an experienced
individual responsible for ensuring compliance (i.e., the
Compliance Officer).

-- Customer identification. Financial institutions are
required to record, verify, and retain customer
identification/basic information in order to determine the
true beneficiary. The required form of identification to
open a bank account and apply for other social benefits is
the National Identification Card. It contains a person,s
photograph and fingerprint, and reportedly is difficult to
duplicate. Accounts include deposit/transaction accounts,
loan and credit accounts, and safe deposit boxes. Customers
include individuals, legal persons, public companies, and
non-profit organizations (e.g., NGOs).

-- Prohibitions on opening anonymous accounts and foreign
correspondence accounts for any person prior to ratification
of the signature from the correspondent bank in the country
at which said person resides.

-- Payable upon proper identification (PUPID).
Non-customers or PUPIDs initiating or receiving funds
transfers exceeding USD 10,000 or its equivalent in any other
currency are required to provide proper identification,
address, occupation, and information on the true beneficiary.

-- Retention of certain financial records for five years.

---------------------------
CENTRAL BANK OF YEMEN (CBY)
---------------------------

12. The CBY was established in 1971 and merged with the Bank
of Yemen when the north and south united in 1990. Its main
functions include monetary policy; currency issues;
management of the official reserves; serving as the bankers,
bank and bank to the ROYG; and supervision of the banking
system. It supervises 17 commercial banks in the country,
four of which are Islamic. Staffing includes 20 examiners.
In addition, the CBY has authority over the 448 money
exchanges that reportedly consist of 20 major exchanges.
However, the supervision of money exchanges is limited to
off-site reviews of financial and compliance records provided
by the money exchanges to the CBY. Typically, CBY examiner
on-site reviews are limited to banks.

13. The banks are examined at least once annually and
reports are issued after each examination. Technically, the
CBY has the authority to implement enforcement action, but in
practice, it provides training to improve inadequacies noted.
CBY admitted that banks/money exchanges still need time to
implement compliance requirements. A meeting with a group of
private bankers indicated that compliance with the AML laws
has been a slow process. Compliance programs have been
developed and implemented one at a time such as the "Know
Your Customer" programs, which are designed to ensure
customer identification and basic information is recorded,
verified and retained. The bankers admitted that developing
effective suspicious activity programs and procedures has
been difficult as more training is needed to better
understand the concept of suspicious activity. In addition,
the bankers indicated that the Bankers Association has done
little to assist with AML compliance issues to date.

14. The formal examination procedures used to test the
bank,s compliance with the AML laws are too limited to be
effective. The procedures consist of approximately 12
questions relating to the existence of a compliance program,
compliance officers, training programs, and reports of cash
transactions over USD 10,000. The procedures are not
comprehensive and do not provide for an assessment of the
aforementioned elements and transaction testing to quantify
the level of compliance.

UNSCR 1267 Compliance
---------------------

15. In response to UNSCR 1267 in September 2003 and the
Yemen,s Council of Ministers, directives, the CBY has
issued a number of circulars (most notably 75304 and 75305)
to all banks operating in Yemen, directing them to freeze the
accounts of 144 persons, companies and organizations on the
1267 consolidated list, and to report any findings to the
CBY. The CBY has issued updated circulars to banks after
updated 1267 information is passed from the Yemeni Embassy in
Washington or Consulate in New York through the Ministry of
Foreign Affairs and is voted on by the Cabinet. However, it
takes approximately one month for the list to be distributed
by the Yemeni Embassy in Washington, D.C., reviewed by
various ministries in Yemen, and received by the CBY. The
CBY hand delivers the list to its financial institutions. To
date, only one report on a blocked account has been filed,
which was hand delivered by the bank to the CBY. In
addition, Yemen has yet to take any action against or freeze
the assets of Sheikh Abdul Majid Zindani, despite his
February 2004 addition to the 1267 list.

------------------------------------
CBY,S CHALLENGES AND VULNERABILITIES
------------------------------------

16. The primary challenge affecting the CBY,s ability to
ensure compliance with AML laws is the lack of adequate
technical training. The CBY indicated that it provides bank
and money exchange training in an attempt to improve
compliance and in lieu of implementing enforcement action for
non-compliance. However, it is alarming that the individuals
providing the training are not adequately trained and do not
appear to have sufficient expertise to conduct the training.
In addition, the current AML laws are not comprehensive, and
the implementation of existing AML laws and minimum

international standards on AML/CTF (i.e., FATF
recommendations and UNSC resolutions) are ineffective. Banks
are still in the process of implementing and understanding
AML issues. The CBY lacks proven enforcement authority, and
the level of non-compliance with AML laws has not been
quantified.

17. The financial sector appears vulnerable to exposure to
ML/TF schemes from certain persons and entities of heightened
risk and through the use of certain products/services,
specifically funds transfers. There are no requirements to
declare currency and its equivalent at border crossings or to
report large currency transactions, and no safe-harbor
provision exists relative to the filing of STRs.

18. The CBY indicated it is vulnerable to corruption and
terrorism. The embezzlement of public funds is rampant, and
terrorist groups have a myriad of ways to smuggle funds
across the country,s porous land and sea borders.
Enforcement of the AML laws is questionable based on the
level of corruption.

19. Other identified weaknesses include the following:

20. The AML laws are not comprehensive and do not address
international minimum standards. For example, the AML laws
do not incorporate the following:
a) All provisions of Recommendation 5 from the Financial
Action Task Force on Money Laundering's List of
Recommendations, specifically conducting on-going due
diligence on business account relationships and scrutiny of
transactions to ensure that the transactions are consistent
with the customer,s known risk profile.
b) Recommendation 6 relating to Politically Exposed Persons
(PEPs).
c) Recommendation 7 relating to correspondent bank
relationships.
d) Recommendation 14 relating to confidentiality of STRs.
Although the AML laws address the recommendation, in practice
the STR form allows for the subject,s signature in
contravention of the AML laws.
e) Recommendation 15 relating to compliance programs to
combat terrorist financing.
f) Recommendation 18 relating to the prohibition of shell
banks.

21. There are no CTF laws. According to the Committee, a
law has been drafted and needs to be vetted by several
ministries before it is presented to Parliament. The
Committee recognizes the proposed CTF law will not be
approved before the mutual evaluation in July 2007, and
indicated it would not likely be approved for another six
months after that. Although there is some indication that
Yemen has provided for international cooperation and review
of non-profit organizations to some degree, the FATF Special
Recommendations on Terrorist Financing have not been
implemented. In addition, UNSCRs 1267 and 1373 are not
addressed in statute, although the CBY did issue a circular
relative to UNSC resolution 1267. However, the procedure in
place does not appear to satisfy the "freeze without delay"
provisions, due to delays in notification. Abdo Hezam Saif,
Head of the Central Bank's AMLIU, told AMEMB Yemen on July
22, 2007 that a joint technical committee (which was formed
from the National Anti-Money Laundering Committee and the
Central Bank's AMLIU) completed the draft CTF law, is making
minor amendments to it, and will forward it to the Cabinet by
mid-August 2007, which will later forward it to Parliament
when Parliament reconvenes in mid-October 2007 at the
earliest.

22. The training provided has not been effective. Two CBY
members attended the International AML/CTF Training in
Arlington, VA in September 2006. Conversations with the CBY
confirmed that these individuals did not subsequently train
other CBY personnel and the banking and money exchange
communities. However, CBY indicated that at least one of the
individuals will serve as a training instructor at the Yemen
Bankers Association. One of the individuals works in the
AMLIU and the other works in Supervision. CBY indicated that
the individuals were overwhelmed by the scope and complexity
of the training course, and also expressed difficulty in
comprehending the materials in English.

23. Money exchanges are largely unregulated. Although they
are required to be licensed by the CBY, the level of


supervision is nominal. The money exchanges are not subject
to the same examination process as banks.

24. There are no reporting requirements for currency
transactions, currency exchanges, monetary instruments, and
funds transfers that are conducted by customers of the
financial institutions.

25. Suspicious activity and reporting thresholds are not
defined.

26. The number of STRs filed is not commensurate with the
perceived AML risks. Since the inception of the AML laws,
the financial institutions have filed only six STRS: two in
2005; three in 2006; and one year-to-date. Although the
latter STR is in the process of review, the other STRs were
not referred to the Public Prosecutor and none were filed by
the money exchanges.

27. Customer due diligence is limited to identification
procedures. There are no requirements to record and
understand the customer,s source of funds and expected
transactions, which would enable the financial institution to
detect patterns and trends of suspicious activity.

28. Potentially high-risk persons/entities and
products/services are not addressed. The identification,
enhanced due diligence, and on-going monitoring of certain
customers (e.g., Politically Exposed Persons, Professional
Service Providers, cash-intensive businesses) and
products/services (e.g., private banking accounts, funds
transfers) would better enable the financial institutions to
detect patterns and trends of suspicious activity.

---------------------------------------------
RECOMMENDED TRAINING AND TECHNICAL ASSISTANCE
---------------------------------------------

Training
--------

29. Basic AML/CTF training is required. Training should be
provided to CBY examiners, AMLIU employees, and perhaps to
representatives of the National AML Committee and Yemen
Bankers Association. The training should be disseminated to
the financial community to ensure they are aware of AML/CTF
efforts and best practices.

30. CBY indicated its two primary training needs relate to
cyber crimes and terrorist financing detection and techniques
used by groups. The Committee indicated its two primary
training needs relate to investigating and tracking funds and
AMLIU systems development.

31. The content of the STRs was discussed with the CBY in a
follow-up meeting held on 03/06/2007. AMEMB Yemen provided
the CBY with a copy of FinCEN,s Suspicious Activity Report
form and instructions in an attempt to assist in developing a
new enhanced STR form. In addition, a copy of the Federal
Financial Institutions Examination Council,s Bank Secrecy
Act/AML Examination Manual was provided to illustrate the
extent to which examination procedures should be developed
and implemented.

32. An offer should be extended to review the CBY,s AML/CTF
examination compliance program (i.e., procedures and
workpapers) to ensure it is comprehensive and effectively
implemented through analyses, assessments, transaction
testing, and sampling techniques.

33. The AML Committee was interested in having the newly
drafted AML/CTF decree reviewed before it is presented to
Parliament. Upon translation and study, the USG should
provide comments with respect to how well the legislation
comports with international standards, as well as
recommendations to bring legislation into compliance with
international standards.

BRYAN

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