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Cablegate: Czech Submission for 2004-2005 Incsr, Part Ii

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PRAGUE 001874

SIPDIS

STATE FOR INL, EZ; JUSTICE FOR OIA, AFMLS; TREASURY FOR
FINCEN

E.O. 12958: N/A
TAGS: KTFN EZ
SUBJECT: CZECH SUBMISSION FOR 2004-2005 INCSR, PART II
MONEY LAUNDERING AND FINANCIAL CRIMES

REF: 254401

1. Both geographic and economic factors render the Czech
Republic vulnerable to money laundering. Tax fraud, narcotics
trafficking, smuggling, auto theft, embezzlement,
racketeering and trafficking in persons are the major sources
of funds that are laundered in the Czech Republic. Domestic
and foreign organized crime groups target Czech financial
institutions for laundering activity; banks, currency
exchanges, casinos and other gaming establishments,
investment companies, and real estate agencies have all been
used to launder criminal proceeds.
2.. The Czech anti-money laundering legislation, Act No
61/1996, Measures against Legalization of Proceeds from
Criminal Activity, went into effect in July 1996. An
amendment in 2000 requires a wide range of financial
institutions to report all suspicious transaction to the
financial analytical unit (FAU) of the Ministry of Finance
and to freeze assets that belong to people listed by the UN
Sanction committee. They also have to freeze all assets of
subjects that belong directly or indirectly to subjects named
on the UN Security Council list. The latest amendment that
came into force in September 2004 brought several major
changes and harmonized Czech legislation with the Second EU
directive. The amendment extends the list of entities which
must report transactions to attorneys, casinos, realtors,
notaries, accountants, tax auditors, and entrepreneurs with
transactions exceeding the EU-standard 15,000 euros. All
listed financial institutions also have a new obligation to
report not only suspicious transactions possibly involving
money laundering, but also those that might be connected to
the financing of terrorism. In connection with that, the FAU
is now authorized to share all information with the Czech
Intelligence Service and the Czech National Security Bureau.
It is hoped that this will improve the timeliness and nature
of exchanges between the different agencies within the Czech
government. However, the real effectiveness of communication
from BIS and the National Security Bureau to the FAU remains
to be tested. The FAU is newly authorized to cooperate and
share information not only with other members of Egmont Group
but also with other counterparts or international
organizations under certain circumstances.
3. The Financial Analytical Unit, the Czech counterpart of
Fincen, can only investigate accounts for which reports of
suspicious transactions have been filled. FAU is an
administrative unit without law enforcement authority. FAU
can ask the banking sector to check for an account in the
name of specific individual or organization. But FAU cannot
order the check, or conduct the investigation itself. While
post believes FAU conducts its investigations in an
appropriate manner, those investigations only cover a tiny
fraction of accounts in the country. Moreover, their primary
purpose has been and remains identifying tax evaders.

4. The financial institution that reports the suspicious
transaction can freeze the account of its client for 24
hours. This can be extended to 72 hours to give FAU time to
find out whether there is any evidence of a crime. If there
is, the case is forwarded to the financial police, who have
another three days to gather necessary evidence. If enough
evidence can be gathered to persuade a judge, the police and
prosecutor continue their work and the account stays frozen
throughout the investigation and prosecution, which could
last months and years. If the judge isn,t satisfied with the
evidence gathered within the 72-hour period, the funds must
be released. These limits do not apply to accounts owned by
individuals or organizations on the UN,s list of terrorists.

5. In July 2002, an amendment to the Criminal Code became
effective. This amendment introduced a new, independent
offense called &Legalization of Proceeds from Crime.8 It
enables prosecution for legalization (laundering) of proceeds
from all serious criminal activity punishable by up to five
years of imprisonment if the person is as a member of an
organized group or obtains considerable benefits from such
offence. A sentence of eight years or forfeiture of property
can be imposed for legalizing the proceeds from drug
trafficking or other very serious crimes, or if the person
commits the offence by abusing his official position. The
latest amendment of the Criminal Code, that came into force
in November 2004, adds new definitions for terrorist attacks
and for financing of terrorism. A penalty of up to 15 years
of imprisonment can be imposed on those who support
terrorists financially, materially or with other means.
6. An extensive revision of the Criminal Procedure Code,
which facilitated the seizure and forfeiture of bank
accounts, became effective January 1, 2002. It allows a
judge, and in preliminary prosecution, a prosecutor or the
police (with consent of a prosecutor) to freeze an account if
the evidence shows that the financial means will be used to
commit a crime, were used to commit a crime, or are proceeds
from criminal activity. In urgent cases the police can also
freeze the account without previous consent of the
prosecutor, but to have to inform the prosecutor within 48
hours, who then confirms the freeze or releases the funds.
The Law on the Administration of Asset Forfeiture in Criminal
Procedure, passed in August 2003, implements provisions on
the handling and care of seized property. That became
effective on January 1, 2004.
7. For years, the Czech Republic had been criticized for
allowing anonymous passbook accounts to exist within the
banking system. Legislation adopted in 2000 prohibited new
anonymous passbook accounts. In 2002, the Act on Banks was
amended to abolish all existing bearer passbooks by December
31, 2002, and by June 2003, approximately 400 million euros
had been converted. While account holders can still withdraw
money from the accounts for the next decade, the accounts do
not earn interest and cannot accept deposits.
8. The number of suspicious transaction reports transmitted
to the FAU has increased significantly, while the number of
reports evaluated and forwarded to law enforcement remains
unchanged. This is interpreted as evidence of the active
participation of mandated entities in the anti-money
laundering regime. After clarifications to the reporting
requirements in 1996, reporting rose from 95 unusual
transactions per annum (1996) to 1,750 suspicious
transactions in 2001, 1,260 in 2002, 1,970 in 2003 and 3,018
from January through November 2004. The number of reports
forwarded to the police increased from none the first year to
115 in 2002 and 114 in 2003. From January through November
2004 there were 90 reports forwarded to police; every case
that was passed to law enforcement was investigated.
9. In July 2004, a new specialized police unit called the
Financial Police (known also as Illegal Proceeds and Tax
Crime Unit) was established. The Department of Criminal
Proceeds and Money Laundering, which used to be part of the
unit fighting organized crime, became a part of the newly
established Financial Police. It is still the main law
enforcement counterpart to FAU, a partnership which has led
to the first formal charges on money laundering.
10. In 2004, the Department of Criminal Proceeds and Money
Laundering investigated 139 cases and secured assets valued
at roughly US$90,000. This compares to 2003 when police
secure approximately US$29,000 113 cases. In 2004 the
department participated in 25 cases investigated by the Czech
National Drug Headquarters and secured assets valued at
US$700,000. In 2003, 23 cases related to drug crimes were
investigated and the department succeeded in securing assets
valued at US$7,250,000.
11. The Ministry of Justice statistics for the first half of
2004 show the first two convictions for attempting to
legalize the proceeds of crime. The only penalties imposed
were a suspended sentence and a fine. 4 people were
prosecuted and 3 were accused, one case was suspended. In
2003 there were 36 cases, five cases were suspended, 7 people
were prosecuted and 7 were accused. There were no
convictions in 2003. One ongoing issue is that in the Czech
Republic, law enforcement must prove that the assets in
question were derived from criminal activity. The accused is
not obligated to prove that the property or assets were
acquired legitimately.
12. The Czech Government has approved the 2004 National
Action Plan for the Fight against Terrorism. This document
covers themes ranging from police work and cooperation to
protection of security interests, enhancement of security
standards, and customs issues. The FAU currently is
distributing &terrorist lists8 to relevant financial and
governmental bodies. Czechs now do have specific laws
criminalizing terrorist financing and have legislation
permitting rapid implementation of UN and EU financial
sanctions, including action against accounts held by
suspected terrorist entities or individuals. A new government
body called the Clearinghouse was instituted in October 2002,
under the FAU; its function is to streamline input from
institutions in order to enhance cooperation and response to
a terrorist threat.
13. Czech authorities have been cooperative in the global
effort to identify suspect terrorist accounts (FAU has
checked the accounts of about a thousand people since the
September 11, 2001) but no accounts have been identified, and
no terrorist assets have been confiscated.
14. The Czech Republic became a signatory to the UN
International Convention for the Suppression of the Financing
of Terrorism in September 2000, but has not yet ratified it.
The main obstacle to ratification is the absence of
legislation on criminal liability of legal persons
(companies). This legislation has been proposed and will
become a part of the whole recodification of the Criminal
Code that authorities hope will take effect in 2006. In the
meantime, the government is trying to identify a different
way through administrative or civil procedure to satisfy
Convention requirements.
15. The Czech Republic is a party to the 1988 UN Drug
Convention and the World Customs Organization's Convention on
Mutual Administrative Assistance for the Prevention
Investigation and Repression of Customs Offenses. An
extradition treaty and an MLAT are in force between the U.S.
and the Czech Republic, though the extradition treaty is 80
years old, based on outdated mutual lists, and does not allow
the extradition of Czech nationals to the US. The Czech
Republic has taken the necessary legislative measures to join
the European Arrest Warrant. However, the EAW has not been
used and there is sharp debate about whether the Czech
constitution even allows the extradition of nationals. It is
hoped that a test case will resolve the issue in 2005.
Formalization of an agreement between the Czech Republic and
Europol took place in 2002. The agreement allows an exchange
of information about specific crimes and investigating
methods, the prevention of crime, and the training of police.
Among the most important crimes cited in the cooperation
agreement are terrorism, drug trafficking, and money
laundering.
16. The FAU is a member of the Egmont Group, and is
authorized to cooperate with its foreign counterparts,
including those not part of the Egmont Group. The Czech
Republic is a party to the Strasbourg Convention and actively
participates in the Council of Europe,s Select Committee of
Experts on the Evaluation of Anti-Money Laundering Measures
(MONEYVAL) as both evaluator and &evaluatee,8 and in 2001
underwent a mutual evaluation by the Committee. The Czech
Republic continues to implement changes to its anti-money
laundering regime based on the results of the mutual
evaluation. In May 2003, the Czech Republic also underwent a
financial sector assessment by the World Bank/IMF. The Czech
Republic is a party to the 1988 UN Drug Convention and in
December 2000 signed, but has not yet ratified, the UN
Convention against Transnational Organized Crime. Czechs
wants to ratify the Convention together with its three
supplemental Protocols which cause the delay in ratification.
The Czech Republic also is a party to the Council of Europe
Convention on Laundering, Search, Seizure and Confiscation of
the Proceeds from Crime.
17. The Czech Republic should continue to enhance its
anti-money laundering regime and should become a party to the
UN International Convention for the Suppression of the
Financing of Terrorism. In addition, the Czech Republic
should continue to work toward supporting and streamlining
its prosecution regime, including shifting the burden of
proof from the prosecutor to the defendant. The question of
compensation of damages in cases of acquittal also needs to
be solved. The Czech Republic should also take steps to
facilitate the forfeiture of assets jointly owned, for
example by husband and wife. This is very complicated at the
moment. The possible confiscation of property as substitution
for illicit proceeds, would also be helpful.

CABANISS

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