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Cablegate: Part Three of Four: Results of Financial Systems

VZCZCXYZ0005
RR RUEHWEB

DE RUEHYN #1424/01 2051002
ZNR UUUUU ZZH
R 241002Z JUL 07
FM AMEMBASSY SANAA
TO RUEHC/SECSTATE WASHDC 7666
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 001424

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 THREE OF FOUR: RESULTS OF FINANCIAL SYSTEMS
ASSESSMENT TEAM VISIT TO YEMEN MAR 1-7, 2007

REF: A. SANAA 1418
B. SANAA 1423

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
third section of the FSAT Team's report focuses on Yemen's
NGO sector. End summary

-----
NGO,S
-----

2. Act. No. 1 of 2001 governs non-governmental organizations
(NGO,s) under the Authority of the Ministry of Social
Affairs and Labor (MOSAL), the ministry responsible for
oversight of charitable NGOs in Yemen. MOSAL has four
directorates: Associations, Institutions, Cooperatives and
Finance. MOSAL also has 22 regional offices in Yemen. These
offices conduct site field visits and regular inspections,
request reports and occasionally attend NGO meetings.

3. In Yemen, all NGOs belong to one of two categories. The
first is an association. An association is open and has
elections. The second type of NGO is a private foundation.
A foundation is created by a donor or group of donors using
their own funding sources. In the case of a foundation, the
donors control the operation of the NGO. The financier
controls the sponsored NGO.

4. According to the law, contributions, gifts, and aid
require prior approval following verification of the legal
source. Penalties for infractions may range from fines to
imprisonment and are theoretically imposed on any individual
that misrepresents the licensed mission and mandate of the
organization or engages in fraud. Act No. 1 places
responsibility for NGO oversight throughout Yemen in the
hands of MOSAL. NGOs are required to submit an annual report
on their financial activities to MOSAL. Periodic field
surveys are also conducted by the Ministry. NGOs are subject
to auditing by the Central Organization for Control and Audit
(COCA) under Act No. 38 of 1992. NGOs with accounts in
excess of one million Yemeni Riyals (USD 50,000) yearly must
be audited by a certified independent legal accountant under
the implementing regulations of Act 1.

5. The CBY, in cooperation with MOSAL, has adopted
precautionary procedures with regards to opening and
management of charitable accounts. These procedures were
passed to NGOs in the form of Circular No. 33989 (June 2002)
and Circular No. 91737 (November 2004).

6. MOSAL, however, only has modest control over the NGOs in
Yemen. The current laws are very open and don,t provide for
centralized oversight and controls over NGOs by MOSAL.
Amendments to the current law are being considered which
would provide for more centralized oversight and control by
MOSAL. For the amendments to be effective, they will have to
receive the support of Parliament, which has been problematic
in the past as several MPs are also involved in
charities/NGOs. In addition, MOSAL is constrained by limited
staff (15-20 personnel devoted to compliance/monitoring).
The staff must vet dozens of requests for the establishment
of new NGOs every month. Timeliness of vetting is an issue,
since by law these requests have to be addressed within 30
days or the NGO will automatically be granted legal status.

7. Yemen has not designated HAMAS or Palestinian Islamic
Jihad as foreign terrorist organizations. Both organizations
maintain offices in Yemen and use them as bases to conduct
fundraising. In conversations with the ROYG Parliament,s
Foreign Affairs Committee and Post, Yemen remains vigilant in
its support for the resistance in the West Bank and Gaza. It
is unlikely that Yemen will take any actions to uproot the
presence of such organizations in the near future.

Financial Aspects of NGO operations
-----------------------------------

8. Foreign nationals are not permitted to establish/register
NGOs in Yemen. International NGOs, however, are allowed to
operate in Yemen. In addition, foreign nationals can
coordinate with international NGOs and foreign donors to gain

financial support for local initiatives. According to MOSAL,
the majority of contributions to NGOs in Yemen come from
foreign donors, who mostly contribute through payment in kind
and not cash. MOSAL believes only a small portion of
donations is diverted from NGOs for nefarious purposes.
Without accurate control measures or staff to conduct proper
audits, it is hard to substantiate this claim.

9. Currently, NGOs can freely transfer funds into or out of
Yemen; the only requirement is that NGOs must notify MOSAL.
(NGOs do not need the permission of MOSAL to transfer funds.)
Yemeni charities are required to have one bank account
opened through MOSAL. Persons with signature authority are
also coordinated through MOSAL.

10. MOSAL cannot freeze or close accounts when violations
occur. They must go through judicial channels to freeze or
close accounts. Over a year ago, it was determined that
1,500 NGOs violated their legal status. MOSAL has filed
paperwork to have these NGOs dissolved, but this has not yet
occurred.

11. MOSAL has a database where all information is stored.
Currently, this database can communicate only between the
main office of MOSAL and five regional offices.

12. Training:

-- MOSAL could benefit from training on the legal and
operational aspects of international money transfers as well
as from auditing and financial investigative training for its
compliance and control staff.

-- MOSAL could also benefit from technical assistance in
completing its centralized database.

-- NGOs need to be educated and trained on their financial
auditing and reporting requirements.

-- MOSAL may benefit from the translated version of U.S.
Treasury,s revised "Best Practices for NGOs and Charities
for Distribution."

-- MOSAL would also benefit from translated copies of the
FATF,s and the MENA FATF,s best practices papers on NGOs.

----------------------
MONEY EXCHANGE BUREAUS
----------------------

13. There are approximately 448 registered money exchange
businesses in Yemen, who primarily serve to exchange
currencies and transfer funds. According to informal
discussions, obtaining a business permit to open and operate
a money exchange business is extremely easy. The process
involves filling out an application and then undergoing some
type of review before the permit is issued. There are two
types of money transfer businesses. One type is used by
individuals and the other type is for commercial customers.
The money transfer businesses can register for one permit
type, but can open offices at several locations. The
transfer of funds over USD 10,000 or more requires the
permission of the Central Bank.

14. The official who oversees regulation of the money
exchange businesses maintained that there was no problem in
regulating this sector. However, the Central Bank noted that
it has not yet begun to examine this sector for AML
compliance.

15. Estimates suggest that somewhere between 60-80 percent
of the population does not use the formal banking system. As
a result, the majority of individuals use the informal
banking system, specifically, alternative remittance systems
and money exchangers. The CBY has issued circulars to money
exchangers outlining policies for all transfers over USD
$10,000.

16. Over three million Yemenis live outside of Yemen and
rely on various informal value transfer systems to transmit
money back to Yemen. These remittances are extremely
important in supporting the Yemeni economy, but it is unclear
if and how most of them are regulated. The CBY claims to
have oversight over the 20 largest money exchangers and will
conduct spot inspections. The CBY also requires that money

exchangers file financial reports to them annually.

17. Given the fact that the CBY has not yet begun systematic
examinations of this sector for compliance and the risks that
the money exchange sector presents globally, it is important
to ensure that the CBY is properly trained and begins to
conduct examinations and audits of this sector.

BRYAN

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