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 TEGUCIGALPA 002565 
 
SIPDIS 
 
STATE FOR INL, WHA/CEN, EB/ESC/TFS 
JUSTICE FOR OIA, AFMLS 
TREASURY FOR FINCEN 
 
E.O. 12958: N/A 
TAGS: ECON KCRM KJUS PGOV PREL HO
SUBJECT: HONDURAS: 2005-2006 INCSR PART II, MONEY 
LAUNDERING AND FINANCIAL CRIMES 
 
REF: SECSTATE 210351 
 
¶1. Per reftel, Post provides its submission for the 2005-2006 
International Narcotics Control Strategy Report (INCSR) Part 
II, Money Laundering And Financial Crimes. 
 
Introduction and General Questions 
 
¶2. Three years after passing a new law against money 
laundering, the government of Honduras has made considerable 
progress in implementing the law and establishing and 
training the entities responsible for the investigation of 
financial crimes.  Department of Treasury officials and Post 
continue to work to improve cooperation among these entities. 
 Sustained progress will depend upon increased commitment 
from the government of Honduras to prosecute financial crimes 
aggressively. 
 
¶3. Honduras is not an important regional or offshore 
financial center and is not considered to have a significant 
black market for smuggled goods (though there have been 
high-profile smuggling cases involving gasoline and other 
consumer goods).  Money laundering, however, does take place 
in Honduras, primarily through the banking sector, but also 
through currency exchange houses and front companies.  The 
vulnerabilities of Honduras to money laundering stem 
primarily from significant trafficking of narcotics, 
especially cocaine, through the region, though smuggling of 
contraband may also generate funds that are laundered through 
the banking system.  Money laundering in Honduras derives 
from both domestic and foreign criminal activity, and the 
proceeds are controlled by local drug trafficking 
organizations and organized crime syndicates.  Honduras is 
not experiencing an increase in financial crimes such as bank 
fraud.  It is not a matter of government policy to encourage, 
facilitate, or engage in laundering the proceeds from illegal 
drug transactions, from other serious crimes, or from 
terrorist financing.  However, corruption remains a serious 
problem, particularly within the judiciary and law 
enforcement sectors. 
 
Laws and Regulations to Prevent Money Laundering/Terrorist 
Financing 
 
¶4. Money laundering has been a criminal offense in Honduras 
since 1998, when the passage of Law. No. 27-98 criminalized 
the laundering of narcotics-related proceeds and introduced 
various record keeping and reporting requirements for 
financial institutions.  However, weaknesses in the law, 
including a narrow definition of money laundering, made it 
virtually impossible to successfully prosecute the crime. 
 
¶5. In 2002, Honduras passed Decree No. 45-2002, which greatly 
strengthened its legal framework and available investigative 
and prosecutorial tools to fight money laundering.  Under the 
new legislation, the definition of money laundering was 
expanded to include the transfer of assets that proceed 
directly or indirectly from trafficking of drugs, arms, human 
organs or people, auto theft, kidnapping, bank and other 
forms of financial fraud, and terrorism, as well as any sale 
or movement of assets that lacks economic justification.  The 
penalty for money laundering is a prison sentence of 15-20 
years.  The law also requires all persons entering or leaving 
Honduras to declare, and if asked, present, money in cash and 
convertible securities ("titulos valores de convertibilidad 
inmediata") that they are carrying if the amount exceeds 
$10,000 or its equivalent. 
 
¶6. Decree No. 45-2002 also created a financial information 
unit, the Unidad de Informacion Financiera (UIF), within the 
Honduran National Banking and Insurance Commission. Banks and 
other financial institutions are required to report to the 
UIF any currency transactions over $10,000 in dollar 
denominated accounts or the equivalent in local currency 
accounts. The law requires the UIF and reporting institutions 
to keep a registry of reported transactions for five years. 
Banks are required to know the identity of all their clients 
and depositors, regardless of the amount of a client's 
deposits, and to keep adequate records of the information. 
The law also includes banker negligence provisions that make 
individual bankers subject to two- to five-year prison terms 
if, by "carelessness, negligence, inexperience or 
non-observance of the law, they permit money to be laundered 
through their institutions."  All of the above requirements 
apply to all financial institutions that are regulated by the 
National Banking and Insurance Commission, which include 
state and private banks, savings and loan associations, 
bonded warehouses, stock markets, currency exchange houses, 
securities dealers, insurance companies, credit associations, 
and casinos.  The law does not, however, extend to the 
activities of lawyers or accountants. 
 
¶7. Decree No. 45-2002 requires that a public prosecutor be 
assigned to the UIF. In practice, two prosecutors are 
assigned to the UIF, each on a part-time basis, with 
responsibility for specific cases divided among them 
depending on their expertise. The prosecutors, under urgent 
conditions and with special authorization, may subpoena data 
and information directly from financial institutions. Public 
prosecutors and police investigators are permitted to use 
electronic surveillance techniques to investigate money 
laundering. 
 
¶8. Under the Criminal Procedure Code, reporting individuals 
such as bank officials are protected by law with respect to 
their cooperation with law enforcement authorities. However, 
some have alleged that their personal security is put at risk 
if the information they report leads to the prosecution of 
money launderers.  This has not been an issue throughout 
2005, however, as only cases originating from the police and 
prosecutors have been presented in court. 
 
¶9. There had been some ambiguity in Honduran law concerning 
the responsibility of banks to report information to the 
regulating authorities and the duty of banks to keep customer 
information confidential.  A new law passed in September 
2004, the Financial System Law (Decree No. 129-2004) 
clarifies this ambiguity, explicitly stating that provision 
of information demanded by regulatory, judicial, or other 
legal authorities shall not be regarded as an improper 
divulgence of confidential information. 
 
¶10. In late December 2004, Decree 24-2004 created the 
InterAgency Commission for the Prevention of Money Laundering 
and Financing of Terrorism (CIPLAFT).  The group was tasked 
as the coordinating entity responsible for ensuring that all 
anti-money laundering and anti-financing of terrorism systems 
operate efficiently and consistently with all relevant laws, 
regulations, resolutions, and directives.  The group meets 
every three months and includes representatives from UIF, the 
prosecuting office, the police and other offices that touch 
on the subject of money laundering and terrorism finance. 
While the meetings represent a good opportunity to identify 
and discuss general ideas and themes, more case specific, 
working level meetings have been proposed in an attempt to 
increase the efficiency of the process. 
 
Prosecutions in 2005 
 
¶11. Prior to 2004, there had been no successful prosecutions 
of money laundering crimes in Honduras.  In 2004, the 
authorities arrested 16 persons for money laundering crimes, 
issued six additional outstanding arrest warrants, and 
secured five convictions.  Six additional convictions were 
made in 2005. 
 
Measures to Prevent Terrorist Financing 
 
¶12. The government of Honduras has been supportive of 
counterterrorism efforts.  Decree No. 45-2002 states that an 
asset transfer related to terrorism is a crime; however, 
terrorist financing has not been identified as a crime 
itself.  The law does not explicitly grant the government the 
authority to freeze or seize terrorist assets; however, on 
separate authority, the National Banking and Insurance 
Commission has issued freeze orders promptly for the 
organizations and individuals named by the UN 1267 Sanctions 
Committee and those organizations and individuals on the list 
of Specially Designated Global Terrorists designated by the 
United States pursuant to Executive Order 13224 (on terrorist 
financing).  The Ministry of Foreign Affairs is responsible 
for instructing the Commission to issue freeze orders. The 
Commission directs Honduran financial institutions to search 
for, hold, and report on terrorist-linked accounts and 
transactions, which, if found, would be frozen. The 
Commission has reported that, to date, no accounts linked to 
the entities or individuals on the lists have been found in 
the Honduran financial system. 
 
¶13. While Honduras is a major recipient of flows of 
remittances (estimated at $1.5 billion in 2005), there has 
been no evidence linking these remittances to the financing 
of terrorism.  Remittances primarily flow from Hondurans 
living in the United States to their relatives in Honduras. 
Most remittances are sent through wire transfer or bank 
services, with some cash probably being transported 
physically from the United States to Honduras.  There is no 
significant indigenous alternative remittance system such as 
hawala operating in Honduras, nor is there any evidence that 
charitable or non-profit entities in Honduras have been used 
as conduits for the financing of terrorism. 
¶14. Honduras signed the 1999 International Convention for the 
Suppression of the Financing of Terrorism on November 11, 
2001, and ratified the convention on March 25, 2003. 
 
Free Trade Zones 
 
¶15. Under Honduran legislation, companies may register for 
"free trade zone" status, and benefit from the associated tax 
benefits, regardless of their location in the country. 
Companies that wish to receive free trade zone status must 
register with the Office of Productive Sectors in the 
Ministry of Industry and Commerce.  The majority of companies 
with free trade zone status operate mostly in the textile and 
apparel industry.  There is no indication that free trade 
zones are being used in trade-based money laundering schemes 
or by the financiers of terrorism. 
 
International Cooperation 
 
¶16. Honduras cooperates with U.S. investigations and requests 
for information pursuant to the 1988 UN Drug Convention. 
Honduras has signed memoranda of understanding to exchange 
information on money laundering investigations with Panama, 
El Salvador, Guatemala, Mexico, Peru, Colombia, and the 
Dominican Republic.  Honduras strives to comply with the 
Basel Committee's "Core Principles for Effective Banking 
Supervision," and the new Financial System Law (Decree No. 
129-2004) passed in September 2004 is designed to improve 
compliance with these international standards.  At the 
regional level, Honduras is a member of the Central American 
Council of Bank Superintendents, which meets periodically to 
exchange information. 
 
¶17. Honduras is a party to the 1988 UN Drug Convention, the 
UN Convention against Illicit Traffic in Narcotic Drugs and 
Psychotropic Substances, the UN International Convention 
against Transnational Organized Crime, and the UN 
International Convention for the Suppression of the Financing 
of Terrorism.  Honduras signed the OAS Inter-American 
Convention on Terrorism in June 2002, ratified the agreement 
on September 22, 2004, and became a party to the agreement 
when it deposited its instruments of ratification on November 
23, 2004.  Honduras signed the UN Convention Against 
Corruption on May 17, 2004.  Honduras is a member of the 
Organization of American States Inter-American Drug Abuse 
Control Commission (OAS/CICAD) Group of Experts to Control 
Money Laundering and the Caribbean Financial Action Task 
Force (CFATF).  In mid-2005, the Honduran UIF was admitted as 
a member in the Egmont Group, signifying that the Honduran 
Unit meets the international standards of Financial 
Information Units.  The membership will allow Honduras to 
share information with FIUs of other member countries in an 
effort to increase international cooperation and enhance 
effectiveness. 
 
¶18. No specific written agreement exists between the United 
States and Honduras to establish a mechanism for exchanging 
adequate records in connection with investigations and 
proceedings relating to narcotics, terrorism, terrorist 
financing, and other crime investigations.  However, Honduras 
has cooperated, when requested, with appropriate law 
enforcement agencies of the U.S. government and other 
governments investigating financial crimes. 
 
Asset Forfeiture and Seizure Legislation 
 
¶19. Congress first enacted an asset seizure law in 1993 that 
subsequent Honduran Supreme Court rulings substantially 
weakened.  Decree No. 45-2002 strengthened the asset seizure 
provisions of the law, establishing an Office of Seized 
Assets (OABI) under the Public Ministry.  The law authorizes 
the Office of Seized Assets to guard and administer "all 
goods, products or instruments" of a crime, and states that 
money seized (or money raised from the auctioning of seized 
goods) should be transferred to the public entities that 
participated in the investigation and prosecution of the 
crime.  Under the Criminal Procedure Code, when goods or 
money are seized in any criminal investigation, a criminal 
charge must be submitted against the suspect within sixty 
days of the seizure.  If one is not submitted, the suspect 
has the right to demand the release of the seized assets. 
 
¶20. Decree No. 45-2002 is not entirely clear on the issue of 
whether a legitimate business can be seized if used to 
launder money which derives from criminal activities.  The 
Chief Prosecutor for Organized Crime maintains that the 
authorities do have this power, since once a "legitimate" 
business is used to launder criminal assets, it ceases to be 
"legitimate" and is subject to seizure proceedings. However, 
this authority is not explicitly granted in the law, and 
there has been no test case to date which would set an 
interpretation.  There are currently no new laws being 
considered regarding seizure or forfeiture of assets of 
criminal activity. 
 
¶21. The total value of assets seized since the 2002 law came 
into effect is estimated at $6.4 million and around $4.6 
million in seized assets (cars, houses, boats, etc.) as of 
December 2005.  The lack of clear records, and differences in 
accounting between OABI, the police and the investigators 
office, make prior year comparisons difficult.  Most of these 
seized assets are alleged to have derived from crimes related 
to drug trafficking; none of the seized assets are suspected 
of being connected to terrorist activity.  The law allows for 
both civil and criminal forfeiture, and there are no 
significant legal loopholes that allow criminals to shield 
their assets. 
 
¶22. However, OABI has not established firm control over the 
asset seizure and forfeiture process.  Implementation of the 
existing law, and the process of equipping OABI to maintain 
control over seized assets and effectively dispose of them, 
has been slow and ineffective.  The two implementing 
regulations governing OABI were not finalized and published 
until more than a year after the passage of the law, and the 
key regulation that governs the distribution of assets is 
still pending action by the Attorney General.  Plans to build 
separate offices and a warehouse for this entity are still 
incomplete, resulting in seized assets currently being kept 
in various locations under dispersed authority.  Money seized 
is kept in various accounts without clear records of control, 
or kept in cash as evidence.  Due to the absence of an 
approved implementing regulation on distribution of assets, 
the Public Ministry has on several occasions used seized cash 
to pay certain employees' salaries, without the money's first 
having passed through a proper legal process for disposition. 
 Similarly, assets seized, such as vehicles, property, and 
boats, are in many cases left unused, rather than being 
distributed for use by government agencies.  Outside of the 
police investigative unit, for example, at least fifty cars 
seized by OABI are left to rust while twenty officers take 
turns using the unit's one active car to pursue 
investigations. 
 
¶23. There is no evidence that traffickers, organized crime 
organizations, or terrorist organizations have taken 
retaliatory actions related to money laundering/terrorist 
financing investigations, government cooperation with the 
USG, or seizure/freezing of assets. 
 
Conclusion 
 
¶24. In 2005, the government of Honduras continued their 
positive steps to implement Decree No. 45-2002.  However, the 
different units involved in the fight against money 
laundering continue to suffer from lack of resources and 
limited interagency communication.  Further progress in 
implementing the new money laundering legislation will depend 
on the training and retention of personnel familiar with 
money laundering and financial crimes and improved ability to 
target and pursue more cases that have a higher probability 
of success.  Key to enabling these agencies is to free more 
resources from OABI.  The government of Honduras should 
continue to support the developing government entities 
responsible for combating money laundering and other 
financial crimes, and ensure that resources are available to 
strengthen its anti-money laundering regime. 
Ford