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Cablegate: Egypt: 2006 International Narcotics Control

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

UNCLAS SECTION 01 OF 04 CAIRO 009387

SIPDIS

STATE FOR INL, NEA/ELA, NEA/RA, AND EB/ESC/TFS
TREASURY FOR FINCEN
JUSTICE FOR OIA AND AFMLS

E.O. 12958: N/A
TAGS: EFIN KCRM KTFN PTER SNAR EG
SUBJECT: EGYPT: 2006 INTERNATIONAL NARCOTICS CONTROL
STRATEGY REPORT (INCSR) PART II

REF: CAIRO 9167

-------
Summary
-------

1. Egypt is not a significant destination for money
laundering or terrorist financing, due to its antiquated and
cumbersome financial system. The Government of Egypt (GOE)
has implemented reforms in the financial sector in 2005, but
this modernization has not made Egypt more attractive to
money launderers. Informal remittance systems, however,
remain unregulated and are a potential means for money
laundering. Egypt does not have an offshore banking sector
or free trade zones. An Anti-Money Laundering Law passed in
2002 criminalized laundering of funds from a variety of
predicate crimes, including terrorism. The law also created
the Money Laundering Combating Unit (MLCU), Egypt's
Financial Intelligence Unit (FIU). The MLCU shares
responsibility with the Central Bank of Egypt (CBE) for
monitoring of financial sector compliance with the Anti-
Money Laundering Law and regulations. Various other GOE law
enforcement agencies assist in money laundering
investigations, depending on the predicate crime. The GOE
cooperates with international efforts to stem terrorist
financing, and monitors non-governmental organizations
(NGOs), including charities, to prevent use of such entities
to finance terrorism. End summary.

-----------------
General Questions
-----------------

2. Egypt is not considered a regional financial center, as
its cumbersome, antiquated financial system makes it
unattractive for banking and/or investment services. Egypt
is therefore not a significant locus of money laundering.
In 2005 the GOE continued financial sector reforms begun in
2004, with the aim of streamlining the financial sector.
These reforms, however, have not produced an increase in the
level of financial crime. Despite banking sector reform,
Egypt is still largely a cash economy, and many financial
transactions do not enter the banking system at all.

3. Of the three cases of money laundering that have reached
the court system in Egypt, one was for proceeds from drug
smuggling, and the other two were for proceeds from
antiquities smuggling. All of these cases stemmed from
domestic rather than foreign criminal activity, and involved
individuals rather than groups.

4. While there is no significant market for illicit or
smuggled goods in Egypt, authorities say that under-
invoicing of imports and exports by Egyptian businessmen is
a relatively common practice. The primary goal for
businessmen who engage in such activity is the avoidance of
taxes and customs fees. It is unclear to what extent price
manipulation may be used for laundering the proceeds of
other crimes. According to the Ministry of Finance,
however, cuts in tariffs in September 2004, followed by cuts
in income and business taxes in June 2005, have encouraged
businesses to begin following proper procedures and
regulations.

5. As noted above, money laundering/terrorist financing is
not a significant phenomenon in Egypt, but informal
remittance systems are unregulated and therefore a potential
means for laundering funds. Egyptian authorities claim that
informal remittances are not widespread in Egypt, but the
number of remittances officially recorded by banks does not
match the large number of Egyptians working overseas, in the
Gulf and elsewhere. Many overseas workers may therefore use
informal means to remit earnings, due to either lack of
trust in or familiarity with banking procedures or to the
lower costs associated with informal remittance systems.
Due to the unregulated nature of informal remittance
systems, it is unclear if and to what extent money
laundering actually occurs through these systems. One
conventional non-bank money transfer systems, Western Union,
is starting to draw more customers. As noted above, despite
reform in the financial sector, Egypt is not experiencing an
increase in other types of financial crime, such as fraud or
counterfeiting.

6. Post is not aware of any Egyptian financial institutions
that engage in currency transactions involving international
narcotics trafficking proceeds in U.S. currency or currency
derived from illegal drug sales in the U.S. or that
otherwise affect the U.S.

--------------------------
Offshore Financial Centers
--------------------------

7. Egypt is not an offshore financial center. Offshore
banks, international business companies and other forms of
exempt or shell companies are not permitted in Egypt.

----------------
Free Trade Zones
----------------

8. Egypt has two types of free zones:

- Public free zones, which are specific geographic
districts administered by the GOE. Public free zones house
both state-owned and/or private enterprises, which receive
duty-free status on imported inputs used in the
manufacturing of goods for re-export. Currently there are
ten public free zones in operation: Alexandria, Nasr City,
Port Said, Suez, Ismailia, Damietta, The Media Zone, Shebin
el Kom, Koft, and East Port Said.

- Private free zones, which are established for a specific
project or company to undertake operations such as mixing,
repackaging, assembly, and manufacturing for re-export. The
current number of private free zones is not available, but
as many as 177 companies have been designated as private
free zones in recent years.

9. There is no indication that Egypt's free zones are being
used for trade-based money laundering schemes or for
financing terrorism. Companies in the public free zones are
registered by the General Authority for Free Zones and
Investment and monitored by the Ministry of Foreign Trade
and Industry. The private free zones are under the
direction and supervision of a special non-governmental
Board of Directors.

--------------------------------------------- ---
Laws and Regulations to Prevent Money Laundering
--------------------------------------------- ---

10. In May 2002, Egypt passed the Anti-Money Laundering Law
(Law No. 80 of 2002). The law does not take an "all serious
crimes" approach, but criminalizes the laundering of funds
from narcotics trafficking, prostitution and other immoral
acts, terrorism, antiquities theft, arms dealing, organized
crime, and numerous other activities. The law did not
repeal Egypt's existing law on secrecy of bank accounts, but
provided the legal justification for providing account
information to responsible civil and criminal authorities.
The law also provided for the establishment of the MLCU as
Egypt's FIU, which officially began operating on March 1,
2003. In June 2003, the administrative regulations of the
Anti-Money Laundering Law were issued as Prime Ministerial
Decree No. 951/2003. The regulations provided the legal
basis by which the MLCU derives its authority, spelled out
the predicate crimes associated with money laundering,
established a board of trustees to govern the MLCU, defined
the role of supervisory authorities and financial
institutions, and allowed for the exchange of information
with foreign competent authorities.

----------------
Financial Sector
----------------

11. Upon its creation, the MLCU began to share
responsibility with CBE's Bank Supervision Unit for
supervising and examining compliance in the financial sector
with anti-money laundering/terrorist financing regulations.
In 2001, before passage of Egypt's Anti-Money Laundering
Law, the CBE Banking Supervision Unit and other financial
regulatory bodies issued a number of anti-money laundering
instructions, including "know your customer" and "suspicious
transaction reporting" (STR) requirements. With passage of
the Anti-Money Laundering Law, banks were also required to
keep all records for five years and numbered or anonymous
financial accounts were prohibited. In March 2004, the CBE
issued instructions requiring banks to establish internal
systems enabling them to comply with the anti-money
laundering laws. In addition, banks are now required to
submit quarterly reports showing the progress made with
respect to their anti-money laundering responsibilities.

12. The CBE also monitors closely bureaux de change and
money transmission companies for foreign exchange control
purposes, with close scrutiny of accounts with transactions
above certain limits. The Capital Market Authority (CMA),
which is responsible for regulating the securities markets,
has also undertaken inspection of firms under its
jurisdiction. The inspections were aimed at explaining and
discussing anti-money laundering regulations and
obligations, as well as at evaluating the implementation of
systems and procedures, including checking for an internal
procedures manual and ensuring the appointment of compliance
officers. An independent insurance regulatory authority is
on the GOE's drawing board, and authorizing legislation will
likely be submitted to parliament in 2006.

13. The executive regulations of the Anti-Money Laundering
Law lowered the threshold for declaring foreign currency at
borders from the equivalent of $20,000 to $10,000. The
declaration requirement was also extended to travelers
leaving as well as entering the country. Enforcement of
this provision is uneven, but the Ministry of Finance claims
that the terrorist attacks of the past year have given extra
impetus to law enforcement agencies to thoroughly scrutinize
currency imports/exports.

---------------------------
Financial Intelligence Unit
---------------------------

14. The MLCU, Egypt's FIU, is an independent entity within
the CBE, and has its own budget and staff, and full legal
authority to examine all STRs and conduct investigations
with the assistance of counterpart law enforcement agencies,
including the Ministry of Interior. Presidential Decree No.
164/2002, issued in June 2002, delineates the structure,
functions, and procedures of the MLCU. The unit handles
implementation of the Anti-Money Laundering Law, including
publishing the executive directives. The MLCU takes
direction from a five-member council, chaired by the
Assistant Minister of Justice for Legislative Affairs. Other
members include the chairman of the CMA, the Deputy Governor
of the CBE, a representative from the Egyptian Banking
Federation, and an expert in financial and banking affairs.
In June 2004 the MLCU was admitted to the Egmont Group of
FIUs.

15. On the administrative side, the Executive Director of
the MLCU is responsible for the operation of the FIU and the
implementation of the policy drafted by the Council of
Trustees. His responsibilities include proposing procedures
and rules to be observed by different entities involved in
combating money laundering, and presenting them to the
Chairman of the Council of Trustees; reviewing the
regulations issued by supervisory authorities for
consistency with legal obligations and to ensure they are up
to date; ensuring the capability and readiness of the Unit's
database; exchanging information with supervisory entities
abroad; acting as point of contact within the GOE; preparing
periodic and annual reports on the operational status of the
Unit; and taking necessary action on STRs recommended to be
reported to the office of the Public Prosecution.

16. Since its inception, the MLCU has received over a
thousand STRs from financial institutions and has
successfully brought three cases to court, one involving
proceeds from drug smuggling and the other two involving
proceeds from antiquities smuggling.

17. Money laundering investigations are carried out by one
of the three law enforcement agencies in Egypt, according to
the type of predicate offense involved. The Ministry of
Interior, which has general jurisdiction for the
investigation of money laundering crimes, has established a
separate anti-money laundering (AML) department, which
includes a contact person for the MLCU who coordinates with
other departments within the ministry. The AML department
works closely with the MLCU during investigations. It has
established its own database to record all the information
it received, including STRs, cases, and treaties. The
Administrative Control Authority has specific responsibility
for investigating cases involving the public sector or
public funds. It also has a close working relationship with
the MLCU. The third law enforcement entity, the National
Security Agency, plays a more limited role in the
investigation of money laundering cases, where the predicate
offense threatens national security. The GOE established a
national committee for coordinating issues regarding anti-
money laundering, which held its first meetings in late
2005.

-------------------
Terrorist Financing
-------------------

18. As noted above, the Anti-Money Laundering Law
criminalized money laundering related to terrorism. The GOE
is in the process of replacing the Emergency Law, in place
since 1981, with an anti-terrorism law, which according to
the MLCU, will include specific measures against terrorist
financing.

19. The CBE circulates to all financial institutions the
list of individuals and entities that have been included in
the UN 1267 Sanctions Committee's consolidated list as being
linked to Osama bin Laden, members of Al Qa'ida or the
Taliban, and that the USG has designated under relevant
authorities. No related assets have been identified,
frozen, seized and/or forfeited in 2005.

20. In 2002, the GOE passed the Law on Civil Associations
and Establishments (Law No. 84 of 2002), which governs the
procedures for setting up NGOs, including their internal
regulations, activities, and financial records. The law
places restrictions on accepting foreign donations without
prior permission from the proper authorities. Both the
Ministry of Social Affairs and the CBE continually monitor
the operations of domestic NGOs and charities to forestall
funding of domestic and foreign terrorist groups. The GOE
has signed, but not yet ratified, the UN International
Convention for the Suppression of the Financing of
Terrorism.

-------------------------
International Cooperation
-------------------------

21. Because of its own historical problems with domestic
terrorism, the GOE has sought closer international
cooperation to counter terrorism and terrorist financing.
The GOE has shown willingness to cooperate with foreign
authorities in criminal investigations, whether they are
related to terrorism or narcotics. In April 2004, citing
the importance of the role that the FIU plays in fighting
serious financial crimes, the GOE, pursuant to Prime
Minister Decree No. 676/2004, decided to grant
representatives from the MLCU membership in the Egyptian
National Committee for International Cooperation in
Combating Terrorism, which was established in 1998. The
other members of the Commission are the Ministry of Justice,
Ministry of Foreign Affairs, Ministry of Interior, and the
National Security Agency.

22. The United States and Egypt have a Mutual Legal
Assistance Treaty, which entered into force November 2001.
Egyptian authorities have cooperated with U.S. efforts to
seek and freeze terrorist assets, circulating to each of
their financial institutions the list of Specially
Designated Global Terrorists designated by the U.S. pursuant
to E.O. 13224. Information about financial and other assets
frozen and/or seized in connection with money laundering and
terrorist financing investigations is not a matter of public
record in Egypt.

23. Egypt was one of the founding members the Middle East
and North Africa Financial Action Task Force (MENA/FATF), a
FATF-style regional body that promotes best practices to
combat money laundering and terrorist financing in the
region. In November 2004, Egypt was elected to a one-year
term as the first Vice-President of MENA/FATF, which was
inaugurated on November 30 in Bahrain by 14 Arab countries.
Egypt is a party to the 1988 UN Drug Convention. In March
2004, it ratified the UN Convention against Transnational
Organized Crime.

24. The GOE has continued implementing reforms in 2005 to
address domestic and international concerns regarding
deficiencies in its banking system and monetary policy.
However, many financial institutions are still in need of
further strengthening. The GOE must seek more law
enforcement and judicial training in order to enhance its
ability to follow suspicious activities through the entire
investigative and judicial process; consider ways of
improving MLCU feedback on STRs to reporting financial
institutions; and more evenly enforce cross-border currency
controls, including reporting requirements. Egypt should
also become a party to the UN International Convention for
the Suppression of the Financing of Terrorism.
JONES

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