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Cablegate: Croatia 2007 Incsr Report - Part Ii: Financial Crimes And

R 290736Z NOV 07
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 8373
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEAWJA/DEPT OF JUSTICE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 04 ZAGREB 001044

SIPDIS

DEPT FOR INL, EB/ESC/TFS, AND EUR/SCE
JUSTICE FOR OIA AND AFMLS
TREASURY FOR FINCEN

E.O. 12958: N/A
TAGS: EFIN KCRM KTFN HR
SUBJECT: CROATIA 2007 INCSR REPORT - PART II: FINANCIAL CRIMES AND
MONEY LAUNDERING

REF: STATE 138204

1. Below is post's submission per reftel of part II of the INCSR on
money laundering.

2. Croatia is a middle income transition economy that is neither a
financial center nor a venue of choice for money laundering
activities. Tourism and services make up the largest portion of GDP.
Croatian authorities consider that most money laundering is linked
to domestic criminal activity, frequently to drugs or to various
"economic crimes," such as fraud and tax evasion.

3. Croatian authorities are concerned about the use of Croatia's
ports and borders for the smuggling of black market goods and are
working with, among others, the Export Border Security office to
tighten controls and screening. However, Croatia does not represent
a sizeable market for smuggled goods and is used primarily as a
transit route for goods destined for other countries in the region.
Between January and July 2007, Customs seized 54 containers and
destroyed the contents of 27 containers. The greatest number of
seizures occurred in the ports of Split, Rijeka and Ploce.

4. Croatia's banking sector is over 90 percent foreign-owned, with
large Italian and Austrian banks dominating the market. There are
no offshore financial institutions and there is no evidence of any
alternative remittance systems operating in the country.

5. Croatia has 15 free zones, 13 of which are in operation. The
free zones were designed to attract investment. Companies operating
in the zones benefit from lower profit taxes and customs and
value-added free import of input materials. These companies are
subject to the same regulation and supervision as other businesses
in the country. There is no evidence that these zones are used for
trade-based money laundering schemes or for terrorist financing.

6. Croatia criminalized money laundering in Article 279 of its
penal code in 1996. In 1997, Croatia passed its Law on the
Prevention of Money Laundering (LPML), requiring banks and non-bank
financial institutions to report transactions that exceed
approximately USD 30,000, as well as any cash transactions that seem
suspicious. Aside from cash, the LPML also requires covered entities
to report all transactions involving gold, precious metals, and
stones, as well as other types of monetary instruments and financial
paper. In 2000, Croatia's Parliament strengthened the country's
penal code to ensure that all indicted individuals could be charged
with the money laundering offense where applicable. Prior to this
change, a person could not be charged with money laundering if the
predicate offense carried a maximum penalty of fewer than five years
in prison.

7. Croatia continued the development of its anti-money laundering
regime in subsequent years. In 2003, Parliament approved the new Law
on the Prevention of Money Laundering (new LPML) that follows the
European Union (EU) Directives. The new law also incorporates
terrorism financing as well as drug smuggling and trafficking in
persons, and requires that all cross-border transactions with cash
or monetary instruments exceeding USD 6,500 be reported to Croatia's
Financial Intelligence Unit (FIU). The new LPML also expands the
list of entities subject to reporting requirements, including
lawyers and notaries. During 2007, the Croatian National Bank
drafted guidelines to include anti-money laundering directives as
well as a manual for supervision that includes specifics for
anti-money laundering.

8. Through its regulatory authority, the Ministry of Finance
requires financial institutions to use specific software to
facilitate compliance with reporting requirements. Cooperation with
regulators is generally good, with major financial institutions
readily cooperating with Croatian authorities. Financial
institutions are required to maintain transaction and customer
identification records for a period of five years. Money exchange
houses are licensed and operate as outposts of banks, with rates
tied to those offered by the banks.

9. Croatia's FIU, the Ured za Sprjecavanje Pranja Novca (Anti-Money
Laundering Department or AMLD), within the Ministry of Finance, has
19 of its possible 22 positions filled. In order to satisfy
conditions set in the Anti-Money Laundering Action Plan, a total of
36 positions must be filled by the end of 2007. During 2006, a total
of 2741 Suspicious Transaction Reports (STRs) were received. The
AMLD opened 281 new analytical cases based on 136 STRs received from
the financial sector, 97 from law enforcement and supervisory
agencies and 48 based on requests from foreign FIUs. Upon completion
of analysis, 87 cases were sent for further investigation and
action. During the first 11 months of 2007, 2131 STRs were received
and 288 analytical cases were opened, of which 151 were based on
financial institution STRs, 100 from law enforcement and supervisory
agencies and 37 were based on requests from foreign FIUs. Once
analysis was completed for the 2007 cases, 79 of them were forwarded
for further action.

10. In 2001, the GOC established a National Center for the
Prevention of Corruption and Organized Crime (USKOK) within the
State Prosecutor's Office. This office has the authority to freeze
assets, including securities and real estate, for up to a year. The
office also has enhanced powers to seek financial transaction
information and to coordinate the investigation of financial crimes.
In October 2004, the Parliament revised the law governing USKOK's
work. The revisions strengthen the tools USKOK can use to combat
organized crime and grant USKOK jurisdiction to investigate
narcotics-linked organized crime cases.

11. An inter-institutional working group for the prevention of money
laundering and terrorist financing began work on March 1, 2007. The
working group includes representatives from 11 governmental
institutions and agencies involved in the anti-money laundering
system (Ministry of Justice, State's Attorneys Office, Ministry of
Interior, five offices from Ministry of Finance, Croatian Financial
Services Supervisory agency, Croatian National Bank and Security
Intelligence Agency). Their objectives include defining and working
through weaknesses and risks at the prevention level as well as
removing obstacles that deter from effective prevention. The
Croatian Financial Services Supervisory Agency and Croatian National
Bank have also established joint committees for coordinating money
laundering related issues and members of those committees are also a
part of the Croatian MONEYVAL delegation.

12. Croatia has a history of strict separation of operations in
justice and law enforcement. Responsibility for investigating
financial crimes remains divided between the police, prosecutor's
office, and the ministry of finance. The AMLD investigates
suspected money laundering, but does not have law enforcement
authority. Cases that show likely criminal activity are forwarded
to the national police, who then open a new, criminal investigation
of the charges. This division of responsibility is partially
responsible for slowing criminal proceedings, as investigative work
is duplicated and the police lack the analytical capacity to
thoroughly investigate complex financial transactions.

13. There have been relatively few actual convictions for money
laundering in Croatia - 13 persons have been convicted for money
laundering since 1997. Of the 13, eight were incarcerated for money
laundering crimes valued at approximately 845,000 HRK ($169,000) in
2007. The AMLD attributes this apparent increase in money
laundering convictions to the "Prevention of and combat against
money-laundering" CARDS program that started in 2006. However,
despite improved inter-ministerial cooperation, significant
shortcomings persist, including continued weak interagency
cooperation, inadequate technical skills of the police and
prosecutors when analyzing and dealing with complex financial crimes
and a general lack of knowledge among members of the banking
community as to what exactly constitutes a money laundering offense.
Although the judicial backlog has been cut from 1.4 million cases to
one million, understaffing, exceedingly long court proceedings and
severe resource constraints hamper the effective prosecution of
criminal cases.

14. Although Croatian investigators have the authority to
temporarily seize property in the course of an investigation, asset
seizure legislation needs strengthening in cases of money
laundering. Croatian legislation provides that, with regard to asset
seizure, the burden falls on the state to prove that the property of
a criminal was purchased with illegal proceeds. There is no civil
asset forfeiture provision in Croatian law. Therefore, it is
extremely difficult to seize assets absent a direct link between a
specific crime and its proceeds. The only exception to this is in
the case of organized crime, where a 2006 amendment to the criminal
code allows for the seizure of property of individuals connected to
organized crime groups without establishing a specific relationship
between the property and the crime.

15. Croatia's legal framework to address terrorist financing is
more robust than for money laundering. In 2003 Croatia UN Convention
Against Corruption and the International Convention for the
Suppression of the Financing of Terrorism in its national law and
the state administration has set up procedures their implementation.
An inter-ministerial working group meets regularly to share
information on terrorism financing, including the circulation
throughout its financial system of all international lists of
designated individuals and entities. Authorities have the right to
identify and, with a court order, to freeze and seize terrorist
finance assets. Law enforcement authorities are able to move quickly
to seek the required court order to freeze suspect accounts and
assets of those individuals or organizations named by the UNSCR 1267
Sanctions Committee. In contrast to other crimes, Croatian law
enforcement officials have greater authority to freeze assets linked
to individuals and entities included in UNSCRs 1267, 1333, and 1390.

16. The AMLD can freeze assets on its own administrative authority
for 72 hours. However, obtaining an extension of the initial 72-hour
period is more complicated, with the Prosecutor's Office requiring
either an international instrument or a formal legal request for an
asset freeze. However, according to an AMLD representative, every
request to extend an asset freeze has been granted per court order
and remained in effect throughout the end of proceedings. In 2006,
Croatian authorities froze the dormant accounts of two individuals
connected to terrorist groups active in neighboring Bosnia and
Herzegovina in the 1990s, in addition to 3 other account freeze
orders. The AMLD ordered 4 asset freezes during the first three
quarters of 2007.

17. In the international arena, the AMLD cooperates fully with
foreign FIUs. Croatia does not have limitations on exchanging
information with international law enforcement on money laundering
investigations. Croatia actively cooperates with its Balkan
neighbors in the law enforcement arena, especially in the fight
against money laundering, where Croatia worked to establish a
regional working group to address the issue. Croatia signed
bilateral agreements with Georgian, Ukrainian and Moldovan FIU
counterparts in 2007 and is also party to a number of bilateral
agreements on law enforcement cooperation with its neighbors, as
well as the Southeastern Europe Cooperative Initiative's Agreement
to Prevent and Combat Trans-border Crime.

18. In addition, Croatia is working in concert with Bosnia and
Herzegovina to stem cross-border money laundering and smuggling. The
joint efforts include the participation by authorities from both
countries as well as the use of new technology and computer programs
developed specifically for this purpose. With a thousand-mile border
between the two countries, and numerous loopholes caused by the
jurisdictional irregularities throughout Bosnia and Herzegovina,
this is one of Croatia's most important projects.

19. In December 2004, Croatia joined 11 other regional prosecutors
in signing a memorandum of understanding to work jointly to fight
organized crime. Croatia also participates as a member in the EU's
Community Assistance for Reconstruction, Development, and Assistance
(CARDS) Program, which seeks to assist countries of the Western
Balkans to achieve a greater level of EU integration. As part of the
CARDS Program, in 2005 Croatia signed multilateral memorandum of
understanding among the FIUs of Albania, Bosnia and Herzegovina,
Serbia, Montenegro, and Macedonia. In 2006, the "Prevention of and
combat against money-laundering" program began with Austrian
twinning partners.

20. Croatia has also intensified its cooperation with Austria,
Germany, Italy, and Slovenia regarding border control and crime. As
a member of the Council of Europe's Select Committee of Experts
(MONEYVAL), Croatia has participated in mutual evaluations with the
other members, both by being evaluated, and by sending experts to
evaluate the progress of other member states. Regionally, Croatia
has assisted and supported the creation of anti-money laundering
legislation and the establishment of FIUs in Albania, Macedonia,
Serbia, and Bosnia and Herzegovina. Croatia is also an active member
of the Egmont Group and sponsored the membership of Albania,
Macedonia and Bosnia and Herzegovina.

21. The 1902 extradition treaty between the Kingdom of Serbia and
the United States remains in force and applies to present-day
extradition between Croatia and the United States. However,
according to the Croatian Constitution, citizens of Croatia may not
be extradited, except to The Hague for the War Crimes Tribunal.

22. Croatia is a party to the UN International Convention for the
Suppression of the Financing of Terrorism and the UN Convention
against Transnational Organized Crime. In April 2005 the GOC
ratified the UN Convention against Corruption. Croatia also is a
party to the 1988 UN Drug Convention; the Council of Europe
Convention on Laundering, Search, Seizure, and Confiscation of the
Proceeds from Crime; and the Convention on Transnational Organized
Crime. In June 2003, Croatia signed the European Convention on the
Transfer of Proceedings in Criminal Matters.

23. Although the Government of Croatia has the mechanisms in place
to combat money laundering, efforts are hampered by an inability to
recruit and retain highly skilled staff for its FIU, a lack of
expertise in financial crimes among the police and judiciary and an
overly burdensome asset forfeiture regime, problems to which the low
number of convictions for money laundering bear witness. With its
EU accession process underway, Croatia is under greater scrutiny of
its ability to successfully combat money laundering. The current
"twinning" project with the Austrian FIU is intended to boost
capacity, but Croatia will need ongoing assistance until the various
parts of its system can begin to work together to produce results.

BRADTKE

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