Cablegate: Iraq: Incsr Report Part Ii - Money Laundering and Financial

DE RUEHGB #3354/01 3630414
R 290414Z DEC 09






SUBJECT: IRAQ: INCSR Report Part II - Money Laundering and Financial

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1. (SBU) Summary: Iraq's economy is primarily cash-based, and there
is little data available on the extent of money laundering in the
country. Smuggling is endemic, involving consumer goods, cigarettes,
and petroleum products. Bulk cash smuggling, counterfeit currency,
trafficking in persons, and intellectual property rights violations
are also major problems. There is a large market in Iraq for stolen
automobiles from Europe and the United States. Ransoms from
kidnappings and extortion cost Iraqi citizens millions of dollars
each year, and the funds are often used to finance terrorist
networks. Trade-based money laundering, customs fraud, and value
transfer are found in the underground economy. There are credible
reports of counterfeiting. Hawala networks, both licensed and
unlicensed, are widely used for legitimate and illegitimate
purposes. Regulation and supervision of the formal and informal
financial sectors is still quite limited and enforcement is subject
to political constraints, resulting in weak internal private sector
controls. Under its Stand-by Arrangement with the International
Monetary Fund, the Central Bank of Iraq (CBI) has completed half of
the necessary prudential regulations and is to finalize the
remainder, including anti-money laundering regulations. End

2. (SBU) Oil production is the main source of revenue for the Iraqi
government, but theft and diversion of oil products is only slowly
being checked. In 2006, the World Bank and the Iraqi Ministry of
Oil's Office of Inspector General estimated that the Iraqi
government loses tens of millions of dollars each year to the
smuggling, diversion, or misallocation of refined oil products.

3. (SBU) Fraudulent investment schemes are also on the rise in
Iraq. For example, in 2008 there was an investment scam in the Basra
area that netted the perpetrator tens of millions of dollars in a
"Ponzi" scheme involving a fake investment company promising
investors huge returns of between 200 to 300 percent every six
months. When the scheme collapsed, the owner of the investment
company fled Iraq with the remaining money.
Corruption is a major challenge and is exacerbated by weak financial
controls in the banking sector and weak links to the international
law enforcement community. Transparency International's 2009
International Corruption Perception index ranked Iraq as 176 out of
180 countries surveyed, demonstrating only minimal change from the
previous year.

4. (SBU) Nevertheless, Iraq is taking demonstrable steps to combat
corruption, including acceding to the UN Convention Against
Corruption, seeking candidacy status in the Extractive Industries
Transparency Initiative and the World Bank's Stolen Asset Recovery
Initiative, pursuing civil service and procurement reforms and legal
assistance agreements with other countries. Iraq does not have a
Mutual Legal Assistance Treaty with the United States and U.S. law
enforcement agencies indicate that cooperation with Iraqi
counterparts had been somewhat sporadic but is increasing. While
Iraq's anti-corruption institutions are making strides to inspect,
audit, and prosecute corruption cases in Iraq's ministries, weak
procurement laws, widespread patronage, and other flaws in internal
Qprocurement laws, widespread patronage, and other flaws in internal
controls and regulations provide opening for fraud and embezzlement.
The U.S. government, international financial institutions, and some
Iraqi leaders are promoting new systems, laws, and enforcement
mechanisms to address these gaps. Nevertheless, these need
concerted will from a broad range of actors including civil society
and senior leadership.

5. (SBU) The Coalition Provision Authority (CPA) Order No. 93, the
"Anti-Money Laundering Act of 2004" (AMLA), continues in force and
governs financial institutions in connection with: money laundering;
financing of crime; financing terrorism; and imposes requirements to
monitor financial transitions. The law also criminalizes money
laundering, financing crime (including the financing of terrorism),
and structuring cash transactions to avoid legal requirements. The
AMLA covers: banks; investment funds; securities dealers; insurance
entities; money transmitters; and foreign currency exchange dealers
as well as persons who deal in financial instruments, precious
metals or gems, and persons who undertake hawala transactions.
Covered entities are also required to verify the identity of
non-account holders performing a transaction or series of
transactions whose value is equal to or greater than five million
Iraqi dinars (approximately $4,250). Beneficial owners must be
identified upon account opening and for transactions exceeding ten

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million Iraqi dinars (approximately $8,500). Records must be
maintained by financial institutions for a period of at least five
years. Covered entities must report suspicious transactions and wait
for guidance before proceeding with the transaction; the relevant
funds are frozen until guidance is received.

6. (SBU) Reports of suspicious transactions are to be completed for
any transaction over four million Iraqi dinars (approximately
$3,400) that are believed to involve funds that are derived from
illegal activities or money laundering, intended for the financing
of crime (including terrorism), or over which a criminal
organization has disposal power, or a transaction conducted to evade
any law or which has no apparent business or other lawful purpose.
Nevertheless, the Government of Iraq is currently drafting a new
anti-money laundering law to replace Order No. 94.

7. (SU) The "tipping off" of customers by bank employees where a
transaction has generated a report of suspicious transaction is
prohibited. Bank employees are protected from liability for
cooperating with the government. Willful violations of the reporting
requirement may result in fines or imprisonment CPA Order No. 94,
the "Banking Law of 2004," gives the CBI the authority to conduct
due diligence on proposed bank management. Order No. 94 establishes
requirements for bank capital, confidentiality of records, audit and
reporting requirements for banks, and prudential standards.

8. (SBU) The CBI is responsible for the supervision of financial
institutions. The CBI was mandated by the AMLA to issue regulations
and require financial institutions to provide employee training,
appoint compliance officers, develop internal procedures and
controls to deter money laundering, and establish an independent
audit function. The CBI has branches in Irbil, Sulaymaniyah, Mosul,
and Basra.

9. (SBU) The CBI headquarters in Baghdad also houses Iraq's
financial intelligence unit, the Money Laundering Reporting Office
(MLRO). The MLRO is responsible for the collection and analysis of
suspicious transactions and forwards the results of their analysis
to law enforcement authorities. The MLRO's primary Iraqi law
enforcement contact is with the Ministry of Interior's Financial
Crimes Unit. The CBI branches are responsible for the licensing and
examining of public and private banks, and the licensing of money
exchangers and money transmitters.

10. (SBU) The CBI is required to conduct examinations of public
banks every six months and private banks every three months. Order
No. 94 gives the CBI administrative enforcement authority including
the removal of institution management and revocation of bank
licenses. The banks provide traditional banking services such as
deposit taking, foreign exchange, transfers, and lending to the
community. There is no time limit for funds to be held in the CBI
for accrual of interest. Outside of this relationship, there is poor
communication between the CBI and Iraq's public and private banks,
particularly with respect to money laundering, terrorist financing,
and other potential risks. The formal financial sector continues to
develop. Thirty seven private banks and six state-owned banks
operate in Iraq. The state-owned banks still control a majority of
Qoperate in Iraq. The state-owned banks still control a majority of
the banking sector.

11. (SBU) The CBI is still experiencing challenges with
communications between its various offices. Efforts are underway to
modernize the banking technology utilized by the CBI, but the effort
has borne little fruit to date. In particular there is a lack of an
adequate electronic payment and wire transfer systems. Electronic
payment systems are being introduced in Iraq, including payment of
pensions by a "Smart Card" (embedded microchip) and electronic
transfers by private banks, but these programs are at an early
stage. There is little institutional knowledge in the CBI, law
enforcement agencies, or the judiciary regarding implementing Iraq's
anti-money laundering/countering the financing of terrorism
(AML/CTF) legislation and combating systemic money laundering and
terrorist finance threats. In addition, the economy is still largely
cash-based. There is widespread societal distrust of banks by the
Iraqi people based on their experiences during the Saddam Hussein

12. (SBU) Bulk cash smuggling is a significant problem in Iraq. The
CBI is considering issuance of regulations to require currency

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transaction reports be filed for the cross-border transfer of
currency in amounts exceeding 15 million Iraqi dinars (approximately
$12,750). Neither Iraqis nor foreigners are permitted to carry more
than $10,000 in U.S. currency when exiting Iraq, but these measures
are rarely enforced. Overseas currency speculation regarding the new
Iraqi dinar is widespread often involving fraudulent schemes. It is
illegal under Iraqi law to export dinars.

13. (SBU) Another vulnerability to Iraq's AML/CTF regime is that
money exchangers and money transmitters, including hawaladars, are
largely unregulated. Because of the efficiency and easy access of
the money exchange business and money transmitters, most people in
Iraq use these businesses to conduct international business. Some
conventional banks can take weeks or months to conduct simple funds
transfers while similar international transactions can be done
rapidly and efficiently through the informal money exchange and
transfer services. Although money exchangers and transmitters are
required to be licensed by the CBI, the level of supervision and
enforcement is minimal. As of late 2009, there were credible media
reports of fraud and theaft involving money changers in some Iraqi

14. (SBU) Money exchangers are not subject to the same level of
supervision as banks nor are they required to report suspicious
transactions to the CBI. The level of training on AML/CTF given by
the CBI to managers and operators of money exchanges and money
transmitter businesses is inadequate. The MLRO, in its present form,
is unable to provide adequate training and guidance on AML/CTF
issues to the banking institutions it oversees, let alone the money
transmitter or money exchange businesses in Iraq. Because the MLRO
is part of the CBI, it also suffers from the same shortcomings as
the CBI regarding communication with the CBI branches outside of
Baghdad and the private banks. Furthermore, the MLRO has no criminal
investigative authority. A recent Iraqi academic study reported
money-laundering activities in the province of Dohuk and warning of
vulnerabilities in the Kurdish Regional Government (KRG) financial

15. (SBU) The MLRO, which was formed in mid-2006, is weak and
requires significant funding, support and training in order to
adequately monitor the formal and informal financial systems in
Iraq. The MLRO is understaffed with approximately 30 personnel, who
have rudimentary accounting capabilities and computer skills.
Additionally, the MLRO's computer equipment and software are
outdated and access to the internet is inadequate. The MLRO receives
little support from the Iraqi law enforcement agencies. Although,
the MLRO is empowered to exchange information with other Iraqi and
foreign government agencies, those contacts are limited. All
financial institutions in Iraq are required to report suspicious
financial transactions, including potential money laundering and
terrorist financing, but only a few reports have been submitted
since the MLRO's establishment. Institutional links between KRG
financial authorities and Baghdad needs strengthening, as well as
cooperation between all institutions involved in tracking and
enforcing financial crimes.
Qenforcing financial crimes.

16. (SBU) The predicate offenses for the crime of money laundering
extend beyond "all serious offenses" to include "some form of
unlawful activity." The penalties for violating the AMLA depend on
the specific nature of the underlying criminal activity. For
example, "money laundering" is punishable by a fine of up to 40
million dinars (approximately $34,000) or twice the value of the
property involved in the transaction, (whichever is greater) or
imprisonment of up to four years or both. Other offenses for which
there are specific penalties include the financing of crime with a
fine of up to 20 million dinars (approximately $17,500) or two years
imprisonment or both and structuring transactions to avoid reporting
requirements of up to 10 million dinars (approximately $8,500) or
one year imprisonment or both. No Iraqi government arrests or
prosecutions for crimes covered under the AMLA have been reported.
The current law is ineffective and is not consistent with the
provisions of the Iraqi legal system. Penalties for violations of
the law are weak. The GOI is in the process of drafting a new AMLA

17. (SBU) The AMLA includes provisions for the forfeiture of any
property. Such property includes, but is not limited to, funds
involved in a covered offense, or property traceable to the

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property, or any property gained as a result of such an offense,
without prejudging the rights of bona fide third parties. The courts
can order confiscation of property, but they can only do so if the
property is directly related to the crime, including drug proceeds.
According to the Iraqi Penal Code, a person must pay the government
back for any property stolen from the government. In other cases of
theft, restitution is made to the victim(s).

18. (SBU) Any property forfeited to the state becomes state
property and goes into the general treasury. Should the government
confiscate perishables, it can sell them while the case is ongoing
and if the defendant is acquitted, the government returns the money
it acquired from the sale of the goods to the defendant. While the
case is ongoing, the government appoints a judicial guardian to
supervise and maintain the property pending the outcome of the case.
The AMLA also blocks any funds or assets, other than real property
(which is covered by separate regulation) belonging to members of
the former Iraqi regime and authorizes the Minister of Finance to
confiscate such assets following a judicial or administrative order.
The lack of automation or infrastructure in the banking sector
hinders the government's ability to identify and freeze assets
linked to illicit activities.

19. (SBU) Iraq has four free trade zones: the Basra/Khor al-Zubair
seaport; Ninewa/Falafel area; Sulaymaniyah; and al-Qaim, located in
western Al Anbar province. Under the Free Trade Zone (FZ) Authority
Law, goods imported or exported from the FZ are generally exempt
from all taxes and duties, unless the goods are to be imported for
use in Iraq. Additionally, capital, profits, and investment income
from projects in the FZ are exempt from taxes and fees throughout
the life of the project, including the foundation and construction
phases. Value transfer via trade goods is a significant problem in
Iraq and the surrounding region

20. (SBU) The CBI distributes the UN 1267 Sanction Committee's
consolidated list of suspected terrorist organizations to the
various banks under its supervision as mandated by the AMLA.
However, no asset seizures or any other information pertaining to
the names on this list has been reported. Currently there is no
legislation in Iraq that allows the GOI to freeze and confiscate
terrorist assets without delay under civil proceedings. This
represents a significant shortfall in the GOI's AML/CTF regime and
in the international standards set by the Financial Action Task
Force (FATF).

21. (SBU) Iraq became a member of the Middle East and North Africa
Financial Action Task Force (MENAFATF) in September 2005. The Iraq
MLRO attended the May 2009 MENA FATF meeting in Bahrain. Iraq also
has not yet undergone a mutual evaluation of its compliance with the
FATF standards. Iraq is a party to the 1988 UN Drug Convention, the
UN Convention against Corruption, and the UN Convention against
Transnational Organized Crime. It is not a party to the UN
Convention for the Suppression of the Financing of Terrorism.

22. (SBU) A USG interagency group lead by the State Department
conducted a Financial System Assessment Team (FSAT) study of Iraq in
September 2009. A report of the findings is forthcoming and will
QSeptember 2009. A report of the findings is forthcoming and will
present recommendations for improvements.
The Government of Iraq has the foundation needed to support the
fight against terrorist financing and money laundering, but needs to
implement existing legislation, bolster the relevant agencies in
Iraq's AML/CTF regime, and issue or establish the proper regulations
and legislation related to combating systemic money laundering and
terrorist financing threats in Iraq.

23. (SBU) The CBI should be particularly cautious about granting
licenses to banks from jurisdictions of concern; the MLRO needs
proper training, equipment, and direction; the Iraqi financial
sector needs to adopt and use AML/CTF standards and best practices;
the GOI should pass legislation that allows Iraq to freeze and
confiscate criminal and terrorist assets; Iraq needs to participate
fully in the MENAFATF by attending its plenary meetings, taking
advantage of its training opportunities and implementing the FATF's
international standards; Iraqi law enforcement and the judiciary at
national and regional levels need to enhance their ability to
soundly interpret, apply, and enforce the legal principles of the
AMLA and therefore better conduct investigations and to cooperate
with one another; Iraqi law enforcement, border authorities, and

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customs service should continue to strengthen border enforcement and
identify and pursue smuggling, trade-based money laundering, and
terrorist financing networks; and, the GOI should make a concerted
effort to combat the corruption that hinders development and impedes
an effective anti-money laundering and counterterrorist financing
regime. Iraq should become a party to the UN Convention for the
Suppression of the Financing of Terrorism.

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