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Cablegate: 2005 Report On Financial Crimes and Money

DE RUEHDM #6524/01 3520723
O 180723Z DEC 05





E.O. 12958: N/A

1. (U) Summary: Throughout 2005, Syria has enacted
legislation to strengthen Anti-Money Laundering and Combating
the Financing of Terror (AML/CFT) regulations in its
financial sector, which has opened up in the last two years
to include four private banks. It has begun to develop a
Financial Intelligence Unit (FIU) with investigative and
sanctioning authority, and is working on integrating its
AML/CFT efforts with other countries in the Middle East and
North Africa branch of the Financial Action Task Force
(MENA/FATF). However, there remain significant AML/CFT
vulnerabilities in Syria's financial and non-financial
sectors that have not been addressed by necessary legislation
or other government action. The United States has designated
the country's largest bank, the Commercial Bank of Syria
(CBS), as an institution of primary money laundering concern
for its involvement in the Iraqi oil-for-food scandal and the
threat that it still may be exploited by criminal
enterprises. In addition, Syria's black market hawaladars
are unregulated, and the country's borders remain porous.
Most of the money laundering threat is of domestic origin and
among Syria's political and business elite, whose corruption
and extra-legal activities represent the biggest obstacle to
Syria fully choking off money laundering and terrorist
financing activities. End summary.

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Syria's Weak but Growing Banking Sector
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2. (U) Syria is not an important regional or offshore
financial center, due primarily to its still under-developed
private banking sector and the fact that the Syrian Pound
(SYP) is not a fully convertible currency. Syria began
taking steps to develop a private banking sector in April
2001, with Law No. 28, which legalized private banking, and
Law No. 29, which established rules on bank secrecy. Bank of
Syria and Overseas, a subsidiary of Lebanon's BLOM Bank, was
the first private bank to open in Syria in January 2004,
followed quickly by Banque BEMO Saudi Fransi and the
International Bank for Trade and Finance. Bank Audi became
the fourth private bank in Syria, opening a Damascus branch
in October 2005. The sector's total capitalization is small,
approximately $300 million USD, and while the banks report
steady growth in their deposit accounts and are playing an
increasing role in providing the business sector with foreign
currency to finance imports, unnecessary regulations that do
not allow banks to make money on their liquidity hamper the
sector's continued development.

3. (U) The banking sector is dominated by the CBS, which
holds almost 90% of all deposits and controls most of the
country's foreign currency reserves. With the liberalization
of the sector and competition from the private banks, the CBS
is preparing to provide a range of retail services and more
competitive interest rates. However, the CBS and the
country's four other specialized public banks- the
Agricultural Cooperative Bank, the Industrial Bank, the Real
Estate Bank, and the People's Credit Bank- still primarily
focus on financing Syria's public enterprises. In May 2004,
the U.S. Department of the Treasury designated the CBS, along
with its subsidiary, the Syrian Lebanese Commercial Bank, as
a financial institution of "primary money laundering
concern," pursuant to Section 311 of the USA Patriot Act.
This designation remains in place due to continued concerns
that the CBS may still be exploited by criminal enterprises.
However, the final rulemaking on the implementation of the
special measure against CBS has not been issued, pending
further discussions between the U.S. Government and the
government of the Syrian Arab Republic (SARG).

Recent AML/CFT Legislation

4. (U) Recent legislation has provided the Central Bank of
Syria with new authority to oversee the banking sector and
investigate financial crimes. The SARG passed Decree 59 in
September 2003 to criminalize money laundering and create an
Anti-Money Laundering Commission, which was established in
May 2004. In response to international pressure to improve
its AML/CFT regulations, the SARG passed Decree 33 in May
2005, which strengthened the Commission and laid the
foundation for a functioning FIU. The Decree finalized the

DAMASCUS 00006524 002 OF 004

Commission's composition to include the Governor of the
Central Bank, a Supreme Court Judge, the Deputy Minister of
Finance, the Deputy Governor for Banking Affairs, the SARG's
Legal Advisor, and will include the Chairman of the Syrian
Financial Market once the Market is operational.

5. (U) Under Decree 33, all banks and non-financial
institutions are required to file Suspicious Activity Reports
(SAR) with the Commission- which is acting as the FIU- for
all transactions over $10,000 USD, as well as all suspicious
transactions regardless of amount. The chairmen of Syria's
private banks report that they employ internationally
recognized Know Your Customer (KYC) procedures to screen
transactions and employ their own private investigators to
check suspicious accounts. In September 2005, the Commission
informed banks that they must use KYC procedures to follow up
on their customers every three years and maintain records on
closed accounts for five years. While non-financial
institutions also are required to file SARs with the
commission, the Central Bank candidly admits that most of
them do not know about the requirements of the law. The
Syrian Chamber of Commerce has organized workshops for its
membership about the law, but it will take some time for the
information to penetrate the market.

6. (U) Once a SAR has been filed, the Commission has the
authority to conduct an investigation, waive bank secrecy on
specific accounts in order to gather additional information,
share information with the police and judicial authorities,
and instruct the police to carry out a criminal
investigation. In addition, Decree 33 empowers the Governor
of the Central Bank, who is the chairman of the Commission,
to share information and sign Memoranda of Understanding
(MOUs) with foreign FIUs. In November 2005, the Prime
Minister announced that the Commission had completed an
internal reorganization, creating four specialized units to:
oversee financial investigations; share information with
other SARG entities including customs, police and the
judiciary; produce AML/CFT guidelines and verify their
implementation; and develop a financial crimes database.

7. (U) Decree 33 provides the Commission with a relatively
broad definition of what constitutes a crime of money
laundering, but one that does not fully meet international
standards. The definition includes acts that attempt to
conceal the proceeds of criminal activities, the act of
knowingly helping a criminal launder funds, and the
possession of money or property that resulted from the
laundering of criminal proceeds. In addition, the law
specifically lists thirteen crimes that are covered under the
AML legislation, including drug crimes, fraud, and the theft
of material for weapons of mass destruction. While a SAR is
under investigation, the Commission can freeze accounts of
suspected money launderers for a non-renewable period of up
to eighteen days. However, the Syrian judicial system is
notoriously slow, and observers contend that this period is
too short to hinder criminal activities. The law also
stipulates the sanctions for convicted money launderers,
including a three to six-year jail sentence and a fine that
is equal to or double the amount of money laundered.
Further, the law allows the SARG to confiscate both the money
and assets of the convicted money launderer.

8. (U) The SARG has taken few meaningful steps in 2005 to
combat terrorist financing (TF). While President Asad signed
Law #5 in March 2005 to formally make Syria a party to the
1999 International Convention on the Suppression of the
Financing of Terrorism, neither Law #5 nor Decree 33 are
clear regarding the illegality of TF. In addition, Decree 33
is ambiguous as to whether TF is a predicate offense for
money laundering. The Anti-Money Laundering Commission does
circulate among its private and public banks the UNSC 1267
Committee's list of terrorists associated with Usama bin
Laden, Al'Qaida and the Taliban. The Commission, through the
Ministry of Foreign Affairs, has informed Post of action it
has taken to freeze the assets of individuals suspected of
being on the list. The total dollar amounts of frozen assets
in 2005 were insignificant.

9. (U) Syria is trying to develop its AML/CFT structure
according to international standards. Syria participated in
the most recent meeting of MENA/FATF, which met in Beirut in
September 2005, and hosted a team from the EGMONT Group, an

DAMASCUS 00006524 003 OF 004

international consortium of countries with fully-functioning
FIUs, regarding the creation of its FIU. Syria has stated
its intention to join the EGMONT Group in the near future.
In addition, Syria will host a legal team from FATF in early
2006, which will assess its progress in enforcing AML/CFT
statutes. In addition, Syria is a party to the 1971 UN
International Convention against Illicit Traffic in Narcotic
Drugs and Psychotropic Substances, and has signed but not
ratified the UN Convention against Transnational Organized
Crime. Syria is receiving significant offers of aid from the
European Union to build the capacity of its financial,
customs and judicial systems, and has queried Post about the
possibility of receiving technical assistance from the USG.
However, due to the current political situation, the SARG and
the USG are not sharing significant amounts of information
regarding AML/CFT issues. What little communication there is
focuses on the Commercial Bank of Syria's efforts to avoid
sanctions associated with its designation as an institution
of primary money laundering concern under Section 311 of the
Patriot Act.

Limited Results, and Systemic Weaknesses

10. (U) Despite the legislative powers of the Commission,
only 100 suspicious transactions were reported in 2005,
including SARs from the police who identified suspected money
laundering activities in the course of other investigations.
There have been no convictions or arrests in 2005. Since
money laundering legislation is new, most judges are not
aware of the law or understand the evidentiary requirements.
The Commission has estimated that it will take at least a
year before Syria's judicial system is fully capable of
prosecuting money laundering cases. The Commission further
reported that it has not conducted investigations into any of
the SARs filed over the past year, and that its ongoing
investigations are into the financial activities of
individuals who already were charged and imprisoned for
financial crimes before Decree 33 went into effect. The
Commission itself is hampered by human resource constraints.
It has a staff of six, and hopes to expand to fifteen by the
end of 2006. Most of the staff has not received extensive
training in AML/CFT, although the European Commission has
expressed its willingness to establish a training center in
the Central Bank.

11. (U) Although Decree 33 provides the Central Bank with a
foundation to combat money laundering, most Syrians still do
not maintain bank accounts. Very few Syrians use checks or
credit cards, and the use of ATM machines is relatively new.
The Syrian economy is primarily cash-based, and Syrians use
moneychangers, some of whom also act as hawaladars, for many
financial transactions. The informal financial sector is
illegal and there is scarce information on its size or
activities. Estimates of the volume of business conducted in
the black market by Syrian moneychangers range between $15-70
million USD a day. Due to the lack of hard data on this
sector, the SARG admits that it does not have visibility into
the amount of money that currently is in circulation. The
SARG has begun issuing new regulations to entice people to
use the banking sector, including offering high interest
Certificates of Deposit and allowing Syrians to access more
foreign currency from banks when they are traveling abroad.
In addition, the SARG has advertised a deadline of January 15
by which it hopes to pass a Moneychangers Law to regulate the
sector. Once the Moneychangers Law is passed, the Commission
will have the authority to monitor the sector under Decree
33. Until the SARG passes sufficient legislation and
enforcement mechanisms, the hawaladars in Syria's black
market remain a source of concern for money laundering and
terrorist financing.

12. (U) The SARG also has not updated its laws regarding
charitable organizations to include strong AML/CFT language.
While the SARG decided at the end of 2004 to restrict
charitable organizations to only distributing non-financial
assistance, the current laws do not require organizations to
submit detailed financial information or information on their
donors. However, the Commission has stated its intention to
cooperate with the Ministry of Social Affairs to deal with
this issue.

DAMASCUS 00006524 004 OF 004

13. (U) While the SARG maintains strict controls on the
amount of money that individuals can take with them out of
the country, there is a high incidence of cash smuggling
across the Lebanese and Jordanian borders. Most of the
smuggling involves SYP, as there are strong markets for
Syrian currency among ex-pat workers and tourists in Lebanon,
Jordan and the Gulf countries, although some of the smuggling
may involve the proceeds of narcotics and other criminal
activity as previously reported. In addition to cash
smuggling, there also is a high rate of commodity smuggling
out of Syria, particularly of diesel, caused by individuals
buying diesel domestically at the low subsidized rate of
approximately 10 cents US per liter and selling it for much
higher prices in neighboring countries. There is evidence
that the smuggling trade is occurring with the knowledge of
or perhaps even under the authority of the Syrian security

14. (U) The General Directorate of Customs has stated that it
is under staffed and insufficiently resourced to effectively
handle the problem of smuggling, and that it currently lacks
the means to share information among border posts or other
government agencies. Customs recently announced that it
plans to develop a special office to combat AML/CFT in
coordination with the Ministry of Finance and Syria,s
security services, and plans to place cameras at all border
posts and link them with a unified database. Customs
currently lacks the infrastructure to effectively monitor or
control even the legitimate movement of currency across its
borders. Tourists are not required to declare the amount of
money they are bringing into Syria, for instance. In order
to combat corruption among customs officers, the General
Directorate of Customs announced in December 2005 that it
plans to ban all cash transactions at the borders, including
the payment of customs duties, and will replace cash
transactions with a system that utilizes pre-paid cards.
However, most of the plans to unify and streamline customs
procedures are far from being realized and depend upon
technical and financial support from foreign donors.

15. (U) Syria's free trade zones also may provide an easy
entry or transit point for the proceeds of criminal
activities. There are seven free zones in Syria, serviced
mostly by subsidiaries of Lebanese banks, including BLOM,
BEMO and Bank of Beirut and Arab Countries (BBAC). The
volume of goods entering the free zones is estimated to be in
the billions of dollars, since all automobiles and automotive
parts enter the zones free of customs tariffs before being
imported into Syria. There also is a significant amount of
trade that transits Syria through the zones, gaining Syrian
value added before being shipped to foreign markets. While
all industries and financial institutions located in the free
zones must be registered with the General Organization for
Free Zones, which is located in the Ministry of Economy and
Trade, the Syrian General Directorate of Customs does not
have strong procedures to check country of origin
certification or the resources to adequately monitor goods
that enter Syria through the zones. There are indications
that Syrians have used the free zones to import goods into
Syria in violation of USG sanctions under the Syrian
Accountability and Lebanese Sovereignty Act.

16. (U) Comment: While Syria has made strides throughout 2005
in developing AML/CFT regulations that govern its financial
sector, non-financial institutions and the unregulated black
market remain very vulnerable to money laundering and
terrorist financiers. In addition, the General Directorate
of Customs, the Central Bank and the judicial system in
particular lack the resources to effectively implement
AML/CFT legislation. Although the SARG has stated its
intention to create the technical foundation through which
different government agencies can share information about
financial crimes, this does not exist to date. In addition
to these logistical problems, there is serious concern that
the SARG lacks the political will to make TF illegal, and to
classify what it sees as legitimate resistance groups as
terrorist organizations. Further, corruption at the highest
levels of government and business may represent the biggest
obstacle to developing an effective and airtight AML/CFT

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