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Cablegate: Costa Rica Incsr Report 2008-2009 Part Ii, Money Laundering

VZCZCXYZ0009
PP RUEHWEB

DE RUEHSJ #0930/01 3312319
ZNR UUUUU ZZH
P 262319Z NOV 08
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC PRIORITY 0309
INFO RUEAWJA/DEPT OF JUSTICE WASHINGTON DC
RUEABND/DRUG ENFORCEMENT ADMIN HQ WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SAN JOSE 000930

SIPDIS

DEPT FOR INL AND WHA/CEN, SCT, AND EEB
JUSTICE FOR OIA, AFMLS, OPDAT, NDDS
TREASURY FOR FINCEN
DEA FOR OILS AND OFFICE OF DIVERSION CONTROL

E.O. 12958: N/A
TAGS: SNAR KCRM KTFN CS
SUBJECT: COSTA RICA INCSR REPORT 2008-2009 PART II, MONEY LAUNDERING

AND FINANCIAL CRIMES

REF: STATE 103810

1. (U) The text of Costa Rica's 2008-2009 INCSR Part II is below.
POC at Post is Robert Andrew.

Costa Rica

Although Costa Rica is not a major regional financial center, it
remains vulnerable to money laundering and other financial crimes.

Narcotics trafficking (mainly cocaine) continues to be a primary
motive for money laundering, but fraud, trafficking in persons, arms

trafficking, corruption, and the presence of Internet gaming
companies all contribute to money laundering activity. While local

criminals are active, the majority of criminal proceeds laundered
derive primarily from foreign criminal activity. Reforms in 2002 to

the Costa Rican counternarcotics law expanded the scope of
anti-money
laundering regulations, but also, unintentionally, created an
opportunity to launder funds by eliminating the government's
licensing and supervision of casinos, jewelers, realtors, attorneys,

cash couriers, and other nonbank financial institutions. While
these
loopholes have not yet been closed, they should be addressed as part

of a bill on terrorist financing and money laundering that is
expected to pass in late 2008 or early 2009. Although terrorist
financing is not yet a crime in Costa Rica, according to the
Government of Costa Rica (GOCR) there is some evidence of FARC money

laundering operations here. In a high-profile case in March 2008, a

prominent couple from the Costa Rican academic community was caught

with a safe containing $480,000 in FARC money. They were not
arrested and have not been charged. The couple was also involved in

a real estate transaction on behalf of a prominent FARC leader,
which
to date has not been investigated. Bank fraud, especially via the
Internet, appears to be on the rise, though there has not been a
rise
in counterfeit currency.

Gambling is legal in Costa Rica, and there is no requirement that
the
currency used in Internet gaming operations be transferred to Costa

Rica. There are well over 250 sports-book companies registered to
operate in Costa Rica.

According to the GOCR, there is a black market for smuggled goods in

Costa Rica, but the size is not known. There is no particular
evidence that it is being funded by narcotics or other illicit
proceeds.

Costa Rica is not considered an offshore financial center. While
the
formal banking industry in Costa Rica is tightly regulated, the
offshore banking sector, which offers banking, corporate and trust
formation services, remains a minor area of concern. Foreign-
domiciled offshore banks can only conduct transactions under a
service contract with a domestic bank, and they do not engage
directly in financial operations in Costa Rica. They must also have

a license to operate in their country of origin. Furthermore, they

must comply with Article 146 of the Costa Rican Central Bank's
Organic Law, which requires offshore banks to have assets of at
least
USD 3 million, a physical presence in Costa Rica, and be subject to

supervision by the banking authorities of their registered country.

Shell banks are not allowed in Costa Rica and regulated institutions

are forbidden from having any direct or indirect relationships with

institutions that may be described as shell banks or fictitious
banks. Bearer shares are not permitted in Costa Rica.

Currently, six offshore banks maintain correspondent operations in
Costa Rica: three from The Bahamas and three from Panama. The GOCR

has supervision agreements with its counterparts in both countries,

permitting the review of correspondent banking operations. However,

these counterpart regulatory authorities occasionally interpret the

agreements in ways that limit review by Costa Rican officials. In
2005, the Attorney General ruled that the Superintendent General of

Financial Entities (SUGEF) lacked authority to regulate offshore
operations due to an apparent contradiction between the 1995 Organic

Law of the Costa Rican Central Bank and Law 8204, the primary anti-
laundering legislation (described below). However, there is a MOU
between Costa Rica and Panama and the Bahamas to allow easy
information exchanges. Draft legislation to correct the
contradiction and reassert the SUGEF's regulatory power was
submitted
to the national assembly for consideration in 2008. Addition
actions
by SUGEF should decrease the number of offshore banks in the next
year.

The GOCR reports that Costa Rica is primarily used as a bridge to
send funds to and from other jurisdictions using, in many cases,
companies or established banks in offshore financial centers.
Alternative remittance systems exist in Costa Rica, mainly as a
result of Costa Rican immigration to the United States, or
Nicaraguans to Costa Rica. However, there is no confirmation that
these remittance systems are used for money laundering.

There are 28 free trade zones (FTZs) within Costa Rica, used by
approximately 250 companies. The Promotora del Comercio Exterior de

Costa Rica (PROCOMER) manages the FTZ regime and has responsibility

for registering all qualifying companies. PROCOMER's qualification

process consists of conducting due diligence on a candidate
company's
finances and assessing the total cost of ownership. PROCOMER
annually audits all of the firms within the FTZ regime and touts its

system of tight controls. The four major types of firms operating
under Costa Rica's FTZ regime are manufacturing, professional
services, trading, and administrative organizations. PROCOMER
reports that there has been no evidence of money laundering activity

in the FTZs in 2008.

In 2002, the GOCR enacted Law 8204. Law 8204 criminalizes the
laundering of proceeds from all serious crimes (not only
drug-related
money laundering), which are defined as crimes carrying a sentence
of
four years or more. Law 8204 obligates financial institutions and
other businesses to identify their clients, report currency
transactions over U.S. $10,000 and suspicious transactions to the
financial intelligence unit (FIU), known in Costa Rica as the Unidad

de Analisis Financiero (UAF). Law 8204 also requires that financial

records be retained for at least five years, and that the beneficial

owners of accounts and funds involved in transactions be identified.

While Law 8204, in theory, applies to the movement of all capital,
current regulations are narrowly interpreted so that the law applies

only to those entities that are involved in the transfer of funds as

a primary business purpose, such as exchange houses and stock
brokerages. Therefore, the law does not cover such entities as
casinos, dealers in jewels and precious metals, insurance companies,

intermediaries such as lawyers, accountants or broker/dealers, or
Internet gambling operations, as their primary business is not the
transfer of funds. However, as part of an anti-terrorism bill that

is expected to pass before the end of 2008 or early 2009, there is a
provision that should correct these loopholes. Additionally, in
April of 2008, several government decrees established new rules to
better identify casino ownership.

Costa Rican financial institutions are regulated by the SUGEF, the
Superintendent General of Securities (SUGEVAL), and the
Superintendent of Pensiones (SUPEN). All three entities fall under

the National Council of Supervision of the Financial System
(CONASSIF). All financial entities subject to the jurisdiction of
SUGEF, SUGEVAL and SUPEN are obligated to submit suspicious
transaction reports (STRs), regardless of the amount involved or
transaction reported. Law 8204 does not establish any protection
for
reporting individuals with respect to their cooperation with law
enforcement entities. Nevertheless, this does not exempt them from

reporting; if they do not file STRs, they may be subject to
pecuniary
sanctions established in Article 81 of Law 8204.

The UAF, which is located within the Costa Rican Drug Institute
(ICD), became operational in 1998. Article 123 of Law 8204 empowers

the UAF to request, collect and analyze STRs and cash transaction
reports (CTRs) submitted by obligated entities. The UAF, if
warranted by its analysis, refers these reports to the Money
Laundering, Financial, and Economic Crimes Unit of the Judicial
Investigative Organization (OIJ), under the Public Ministry
(Prosecutor's Office). Each superintendency holds the CTRs until
they determine further analysis is required or until the UAF
requests
them. All requests and reports from the UAF must be signed by the
Director of the ICD.

The UAF has no regulatory responsibilities. The UAF has access to
the records and databases of financial institutions and other
government entities, but the OIJ must obtain a court order if the
information collected is to be used as evidence in court.
Additionally, there are formal mechanisms in place to share
information domestically and with other countries' FIUs.

In spite of its broad access to government information and high
levels of cooperation with the financial sector, the UAF is somewhat

ill-equipped and under-funded to provide information needed by
investigators. However, in 2009 the UAF plans to hire four
additional forensic auditors and one investigator, bringing total
staffing to 27. In 2008, the UAF continued to increase the quality

of its analysis and forwarded more thoroughly analyzed cases to
prosecutors. The UAF received 500 STRs in 2008; 36 were forwarded
to
the OIJ for investigation.

The GOCR body responsible for investigating financial crimes is the

financial investigations unit (or Unidad de Investigacion
Financiero-
UIF) of the OIJ. The OIJ reports that currency smuggling has
increased at their land borders; also, they suspect money laundering

is occurring through the use of wire-transfer services. The OIJ is

assisted by the UAF and has adequately trained staff. In 2008,
there
were two prosecutions for financial crimes. The UAF's primary
mission is analysis; the UIF is investigative.

All persons carrying, entering or exiting Costa Rica are required to

declare any amount over U.S. $10,000 to Costa Rican officials at
ports of entry. Declaration forms are required. Cash smuggling
reports are entered into a database maintained by ICD and is shared

with appropriate government agencies, including the UAF.

Articles 33 and 34 of Law 8204 cover asset forfeiture and stipulate

that all movable or immovable property used in the commission of
crimes covered by this act shall be subject to preventative seizure.

When asset seizure or freeze takes place, the property is placed in
a
legal deposit under the control of ICD. The banking industry
closely
cooperates with law enforcement efforts to trace funds and seize or

freeze bank accounts. During 2008, officials seized over USD 2
million in narcotics-related assets, much of it in undeclared cash.

Seized assets are processed by the ICD and if judicially forfeited,

are divided among drug treatment agencies (60 percent), law
enforcement agencies (30 percent), and the ICD (10 percent) or as
determined by ICD's council.

Although the GOCR has ratified the major UN counterterrorism
conventions, terrorist financing is not yet a crime in Costa Rica.

In 2002, a government task force drafted a comprehensive
counterterrorism law with specific terrorist financing provisions.

The draft law, when passed, would expand existing laws to include
the
financing of terrorism and enhance existing narcotics laws by
incorporating the prevention of terrorist financing. In 2008, Costa

Rica received a third extension to pass this law on terrorist
financing to avoid being expelled from the Egmont Group of financial

intelligence units. The GOCR expects the legislation to be passed
in
late 2008 or early 2009, before the extended deadline of March 2009.

In addition to the pending law on terrorism, the GOCR's legislature

is working to pass an organized crime bill which would close
additional money-laundering loopholes.

Costa Rican authorities receive and circulate to all financial
institutions the names of suspected terrorists and terrorist
organizations listed on the UN 1267 Sanctions Committee consolidated

list and the list of Specially esignated Global Terrorists
designated by the Unted States pursuant to E.O. 13224. However,
thee authorities cannot block, seize, or freeze property without
prior judicial approval. Thus, Costa Rica lacks the ability to
expeditiously freeze assets connected to terrorism. However, no
assets related to designated individuals or entities were identified

in Costa Rica in 2008.

Costa Rica fully cooperates with appropriate USG law enforcement
agencies and other governments investigating financial crimes
related
to narcotics and other crimes. Articles 30 and 31 of Law 8204 grant

authority to the UAF to cooperate with other countries in
investigations, proceedings, and operations concerning financial and

other crimes covered under that law.

Costa Rica is a party to the 1988 UN Drug Convention, the UN
International Convention for the Suppression of the Financing of
Terrorism, and the UN Convention against Transnational Organized
Crime. On March 21, 2007, the GOCR ratified the UN Convention
against Corruption. The GOCR has also signed, but not yet ratified,

the Organization of American States (OAS) Inter-American Convention

on Mutual Assistance in Criminal Matters, and has ratified the
Inter-
American Convention against Terrorism. Costa Rica is a member of
the
Caribbean Financial Action Task Force (CFATF). As noted above,
SUGEF
has signed MOUs with Panama and the Bahamas to help regulate the six

offshore banks that have representation here. The most recent
mutual
evaluation of Costa Rica was conducted by the CFATF in July 2006.
The GOCR is a member of the Money Laundering Experts Working Group
of
the OAS Inter-American Drug Abuse Control Commission (OAS/CICAD).
The UAF is a member of the Egmont Group.

Even though the Government of Costa Rica convicted a handful of
individuals for money laundering over the last several years,
further
efforts are required to bring Costa Rica into compliance with
international anti-money laundering and counter-terrorist financing

standards. In 2009, Post plans to introduce the GOCR to various
training opportunities offered by organizations such as the
Department of Justice, ICE (of DHS), the Florida International
Bankers' Association, and the Federal Reserve Bank of Atlanta. In
addition, Post plans to link relevant agencies in the GOCR to peer
agencies in other Latin American countries, most notably Colombia
and
Mexico.

The GOCR needs to criminalize terrorist financing prior to the
Egmont
Group March 2009 deadline for expulsion. The GOCR also needs to
pass
legislation that reconciles contradictions regarding the supervision

of its offshore banking sector, and should extend its anti-money
laundering legislation and regulations to cover the Internet gaming

sector, dealers in jewelry and precious metals, attorneys, casinos,

as well as any business activity that might entail the use of cash
and other nonbank financial institutions. Finally, Costa Rica
should
continue to ensure that its financial intelligence unit and other
GOCR authorities are adequately equipped to combat financial crime.

CIANCHETTE

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