VZCZCXYZ0000
RR RUEHWEB

DE RUEHBW #1899/01 3261324
ZNR UUUUU ZZH
R 221324Z NOV 06
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 9775
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RHMFIUU/FBI WASHINGTON DC

UNCLAS BELGRADE 001899 
 
SIPDIS 
 
STATE FOR EB/ESC/TFS; INL; EUR/SCE/DSCHROEDER 
TREASURY FOR FINCEN AND U/S TIMOTHY ADAMS 
DOJ FOR OIA AND AFMLS AND CARL ALEXANDRE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN KCRM KTFN PTER SNAR SR MW
SUBJECT: SERBIA: 2006-2007 INCSR SUBMISSION PART II - 
FINANCIAL CRIMES AND MONEY LAUNDERING 
 
REF: STATE 157000 
 
INTRODUCTION 
------------ 
¶1.  As the result of a public referendum on May 21, 2006, 
the State Union of Serbia and Montenegro (SAM) was 
dissolved and Montenegro became an independent country. The 
Government of the Republic of Serbia (GOS) became the 
legacy member of the Council of Europe and the United 
Nations. As a result, all treaties and agreements signed by 
the State Union are now applicable to Serbia. Separate 
reports will be submitted for the Republic of Serbia, 
Kosovo and the Republic of Montenegro. 
 
¶2.  The Serbian parliament adopted a new constitution on 
November 8, 2006, and passed a Constitution Law for its 
implementation after a new Parliament is elected on January 
21, 2007.  It is unclear at this time whether the 
implementation of the new constitution will impact existing 
and pending legislation in regards to Serbia's anti-money 
laundering/counter-terrorist financing (AML/CFT) regime. 
 
¶3.  At the crossroads of Europe and on the major trade 
corridor known as the "Balkan route," Serbia still 
confronts narcotics trafficking, smuggling of persons, 
drugs, weapons and pirated goods, money laundering, and 
other criminal activities. Serbia is not a regional 
financial center, nor is it a money-laundering center. 
Serbia is located in Southeastern Europe (the Balkans), 
bordering Macedonia and Kosovo to the south, Romania and 
Bulgaria to the east, and Croatia and Montenegro to the 
west, and Hungary to the north. Major highways carry 
European-bound traffic through Croatia and Hungary.  Within 
the Republic of Serbia is the nominally autonomous province 
of Vojvodina.  Kosovo, recognized by the UN as part of 
Serbia, has been administered by the United Nations Mission 
in Kosovo since 1999. (Since Serbia no longer exercises 
effective control over Kosovo, this report does not address 
Kosovo.) Serbia has a population of approximately 8 
million. 
 
¶4.  A significant volume of money flows to Cyprus, 
reportedly as the payment for goods and services. The 
records maintained by various government entities vary 
significantly on the volume and value of imports from this 
small island nation. According to official statistics from 
the National Bank of Serbia, over USD 1 billion in payments 
in 2005, coded as being for goods and services, rank Cyprus 
among the top five exporters of goods or services to 
Serbia. The Serbian Statistical Office reflected imports 
from Cyprus of roughly USD40 million in 2005. According to 
GOS officials, much of the difference is due to payments 
made to accounts in Cyprus for goods actually originating 
from a third jurisdiction, e.g., Russian oil. 
 
¶5.  Serbia continues to be a significant black market for 
smuggled goods. Illegal proceeds are generated from 
predicate, or antecedent, crimes such as drug trafficking, 
official corruption, tax evasion, organized crime and other 
types of crimes. Proceeds from illegal activities are being 
heavily invested in all forms of real estate. The 
construction and renovation of commercial buildings such as 
offices, apartments, high-end retail businesses as well as 
personal residences is evident in the capital of Belgrade 
as well as other major cities. Trade-based money 
laundering, in the form of over- and under-invoicing, are 
common methods used to launder money. 
 
¶6.  Serbia has 14 designated free trade zones, three of 
which are in operation.  The free zones were established to 
provide customs duties benefits to companies operating out 
of these zones and therefore attract investment.  These 
companies are subject to the same supervision as other 
businesses in the country.  There is no evidence of trade- 
based money laundering schemes or terrorist financing in 
these zones. 
 
¶7.  Serbia introduced a VAT tax in 2005, and the full 
impact of refund fraud associated with the administration 
of the VAT is still not clear. Serbia's Tax Administration 
lacks the audit and investigative capacity or resources to 
adequately investigate the large number of suspicious 
transactions that are forwarded by Serbia's Financial 
Intelligence Unit (FIU). In addition, current tax law sets 
a low threshold for auditing purposes and has increased the 
burden on the Tax Administration. This creates a situation 
 
where criminals can spend and invest criminal proceeds 
freely with little fear of challenge by the tax authorities 
or other law enforcement agencies. 
 
¶8.  The difficulty of convicting a suspect of money 
laundering without a conviction for the original criminal 
act and the unwillingness of the courts to accept 
circumstantial evidence to support money laundering or tax 
evasion charges is hampering law enforcement and 
prosecutors in following the movement and investment of 
illegal proceeds and effectively using the anti-money 
laundering laws. The GOS has not identified any activities 
relating to the financing of terrorism. Terrorist financing 
was criminalized in September 2005, but the law that fully 
addresses the UNSCR standards and that gives the FIU the 
necessary power to require the reporting of terrorism 
financing-related suspicious transactions is still pending. 
 
¶9.  Serbia's banking sector is over 80 percent foreign 
owned.  There are no offshore financial institutions, and 
there is no evidence of any alternative remittance systems 
operating in the country.  There is no provision in the 
banking law that allows the establishment of offshore 
banks, shell companies or trusts.  There is also no 
evidence of financial institutions engaging in currency 
transactions involving international narcotics trafficking 
proceeds.  Banking laws allow financial institutions to 
disclose client and ownership information to law 
enforcement authorities in the course of investigations. 
 
LEGISLATIVE FRAMEWORK 
--------------------- 
¶10.  In September 2005, Serbia codified an expanded 
definition of money laundering in the Penal Code. This 
gives police and prosecutors more flexibility to pursue 
money laundering charges since the money laundering conduct 
is broader under the new law and in conformity with 
international standards. The penalty for money laundering 
is up to 10 years imprisonment. This is significant in that 
under Serbian law and procedure, it falls into the serious 
crime category and permits the use of Mutual Legal 
Assistance (MLAT) procedures to obtain information from 
abroad. With the penalties previously applicable for money 
laundering, it did not fall into the serious crime 
category, and use of the MLAT or letters rogatory were not 
an option in cases where a serious crime could not be 
identified as the source of the suspected illegal proceeds. 
 
¶11.  On November 28, 2005, Serbia adopted a revised anti- 
money laundering law (revised AML Law), replacing the July 
2002 Law on the Prevention of Money Laundering. The revised 
AML Law expands the number of entities required to collect 
certain information on all cash transactions over EUR 
15,000, or the dinar equivalent, and to file currency 
transaction reports (CTRs) for all such transactions 
exceeding this threshold to the FIU. Suspicious 
transactions in any amount must be reported to the FIU. The 
law expands those entities subject to reporting and record 
keeping requirements, adding attorneys, auditors, tax 
advisors and accountants to the banks, currency exchanges, 
insurance companies, casinos, securities brokers, dealers 
in high value goods and travel agents already required to 
comply with the AML provisions; required records must be 
maintained for five years. These entities are protected 
with respect to their cooperation with law enforcement 
entities. Other significant changes include the authority 
of the FIU to freeze transactions for up to 72 hours and to 
require covered entities and individuals to monitor 
customers' accounts where money laundering is suspected. 
The revised AML Law also eliminates a previous provision 
limiting prosecution to crimes committed within Serbian 
territory.  Significant improvement has been noted in 
financial institution compliance, i.e., gathering and 
keeping records on customers and transactions. The flow of 
information to the FIU has been steadily increasing, but 
not all entities are yet subject to implementing bylaws. 
 
¶12.  The Law on Foreign Exchange Operations, adopted in 
2006, criminalizes the use of false or inflated invoices or 
documents to effect the transfer of funds out of the 
country. This law was enacted in part to counter the 
perceived problem of import-export fraud and money 
laundering. According to the law, residents and 
nonresidents are obliged to declare to Customs authorities 
all foreign currency or dinars or securities in amounts 
exceeding EUR 5,000 that will be transported across the 
 
border. 
 
ENFORCEMENT AND SUPERVISION CAPACITIES 
-------------------------------------- 
¶13.  The National Bank of Serbia (NBS) has supervisory 
authority over banks, currency exchanges, insurance and 
leasing companies. The NBS has issued regulations requiring 
banks to have compliance and know-your-customer (KYC) 
programs in place and to identify the beneficial owners of 
new accounts. Similar regulations are in process for 
insurance companies. The Law on Banks includes a provision 
allowing the NBS to revoke a bank's license for activities 
related to, among other things, money laundering and 
terrorist financing. To date, the NBS has not used this 
revocation authority. The legal framework is in place, but 
the NBS currently lacks the expertise needed for effective 
bank supervision. It is building these capacities through 
training and staff development. 
 
¶14.  The Securities Commission (SC) supervises broker- 
dealers and investment funds. The Law on Investment Funds 
and the Law on Securities and Other Financial Instruments 
Market provide the SC with the authority to "examine" the 
source of investment capital during licensing procedures. 
The SC is also charged with monitoring its obligors' 
compliance with the AML Laws. Regulations to implement this 
authority are in process. 
 
¶15.  The 2001 AML law created Serbia's FIU, the 
Administration for the Prevention of Money Laundering 
(APML). The revised AML Law elevates the status of the FIU 
to that of an administrative body under the Ministry of 
Finance from its previous status as a "sector" in that 
Ministry. This provides more autonomy for the agency to 
carry out its mandate, as well as additional resources. One 
important change is that the APML now has its own line item 
operating budget. The APML currently has 24 employees. In 
accordance with the revised AML Law, the APML developed 
listings of suspicious activity red flags for banks, 
currency exchange offices, insurance companies, securities 
brokers and leasing companies. The APML has signed 
memoranda of understanding (MOU) on the exchange of 
information with the NBS and Customs and is negotiating one 
with the Tax Administration. 
 
¶16.  The FIU received 279 suspicious transaction reports 
(STRs) in 2005 and 361 through September 1, 2006. Virtually 
all of the STRs received by the FIU have been filed by 
commercial banks. Currency exchange offices have filed only 
seven STRs since 2003, and none in either 2005 or 2006. 
Since its inception in 2003, the APML has opened 240 cases, 
74 based on the STRs it received and 166 based on CTRs (see 
para 9), or referrals from other entities; 103 cases were 
referred to either law enforcement or the prosecutor's 
office for further investigation. Since 2004, authorities 
filed 41 criminal charges against 48 persons for money 
laundering violations. The most common predicate crime is 
"abuse of office". Of this number, 18 are currently under 
investigation, six were dismissed or terminated; 14 were 
indicted; and two court decisions have been reached so far 
Q one person was acquitted and the other was convicted in 
the first instance, with an appeal in process. The case on 
appeal involves just over $52,000. 
 
¶17.  A new Anti-Money Laundering Section was established 
within the Suppression of Organized Crime Service (SOCS) of 
the Ministry of Interior to better focus financial 
investigations. 
 
COUNTERING TERRORISM FINANCING 
------------------------------ 
¶18.  In August 2005, the GOS established the Permanent 
Coordinating Group (PCG), an interagency working group 
originally tasked with developing an implementation plan 
for the recommendations from MONEYVAL's first-round 
evaluation in October 2003. A subgroup was tasked with 
drafting a new law to address the procedures needed to 
comply with UN Security Council resolutions regarding the 
freezing, seizing and confiscation of suspected terrorist 
assets, and to require reporting to the FIU of transactions 
suspected to be terrorist financing. Rather than having 
standing meetings, the PCG appears to meet only 
intermittently as required for specific tasks. The 
government still needs better interagency coordination to 
improve information sharing, record keeping and statistics, 
and thereby introduce a more effective regime and permit a 
 
meaningful assessment of its AML/CFT efforts at all levels 
of government. 
 
¶19.  In September 2005 Serbia criminalized the financing of 
terrorism through the adoption of the new Penal Code. Under 
Serbian law, assets derived from criminal activity or 
suspected of involvement in the financing of terrorism can 
be confiscated upon conviction for an offense. The APML is 
the authority charged with enforcing the UNSCR 1267 
provisions regarding suspected terrorist lists.  A draft 
law on terrorist financing, now pending Parliamentary 
approval, will apply the provisions of the AML laws to 
terrorist financing and will put in place a freezing 
mechanism based on UNSCR provisions.  Although the APML 
routinely provides the UN list of suspected terrorist 
organizations to the banking community, checks for suspect 
accounts have revealed no evidence of terrorist financing 
within the banking system and no evidence of the usage of 
alternative remittance systems. The Department for the 
Suppression of Organized Crime Service (SOCS), the Special 
Anti-Terrorist Unit (SAJ) and Gendarmarie, in the Ministry 
of Interior, are the law enforcement bodies responsible for 
planning and conducting the most complex anti-terrorism 
operations. SOCS cooperates and shares information with its 
counterpart agencies in all of the countries bordering 
Serbia.  Serbia has criminalized the financing of 
terrorism, but the freezing, seizing and confiscation of 
assets of terrorists in accordance with UN Security Council 
resolutions still lacks a legal basis, pending enactment of 
the Anti-terrorism Finance law. 
 
INTERNATIONAL COOPERATION 
------------------------- 
¶20.  Because of its successor status after the dissolution 
of the state union with Montenegro, the GOS is a party to 
the 1988 UN Convention against Illicit Traffic in Narcotic 
Drugs and Psychotropic Substances and the UN Convention 
against Transnational Organized Crime. On October 9, 2003, 
the former state union ratified the Council of Europe's 
Convention on Laundering, Search, Seizure, and Confiscation 
of the Proceeds from Crime. The GOS is a party to 11 of the 
12 UN Conventions or Protocols dealing with terrorism, 
including the UN International Convention for the 
Suppression of the Financing of Terrorism, although 
domestic implementation procedures do not provide the 
framework for full application. As mentioned above, Serbia 
has criminalized the financing of terrorism, but the 
freezing, seizing and confiscation of assets of terrorists 
in accordance with UN Security Council resolutions still 
lacks a legal basis, pending the enactment of the draft 
Anti-terrorism Finance law. The GOS also has ratified the 
UN Convention against Corruption. As a member of the 
Council of Europe, the GOS is a full and active member of 
the Council's MONEYVAL Committee. In July 2003, the APML 
became a member of the Egmont Group and actively 
participates in information exchanges with counterpart 
FIUs. 
 
¶21.  Serbia has no laws governing its cooperation with 
other governments related to narcotics, terrorism, or 
terrorist financing. Cooperation is instead based on 
participation in Interpol, bilateral cooperation 
agreements, and agreements concerning international legal 
assistance. There are no laws at all governing the sharing 
of confiscated assets with other countries, nor is any 
legislation under consideration; the GOS may at this time 
enter into bilateral agreements for this purpose. 
 
¶22.  Serbia does not have a mutual legal assistance 
arrangement with the United States, but information 
exchange via a letter rogatory is standard. The GOS has 
bilateral agreements on mutual legal assistance with 31 
countries. These agreements authorize extradition of 
suspected terrorists. The 1902 extradition treaty between 
the Kingdom of Serbia and the United States remains in 
force. The GOS generally cooperates with its counterparts 
and neighbors, and it has responded to U.S. Department of 
Treasury FINCEN requests for information in a timely 
manner. In April 2003, the former SAM joined eight other 
participants in the South Eastern Europe Cooperation 
Process, in adopting a joint "Belgrade Declaration" to call 
for the continuation of regional cooperation and the 
intensification of the fight against terrorism and 
organized crime. The Serbian FIU has signed information 
sharing memorandums of understanding (MOUs) with Macedonia, 
Romania, Belgium, Slovenia, Montenegro, Albania, Georgia, 
 
Ukraine, Bulgaria, Croatia, and Bosnia and Hercegovina. 
 
Pending Agenda 
-------------- 
¶23.  Among the pending legal infrastructure necessary for 
Serbia to be fully compliant with international standards 
are: 
 
-- legislation providing for the liability of legal persons 
for money laundering and terrorist financing; 
-- regulations to apply all requirements of the Revised AML 
Law to covered non-bank financial institutions; 
-- legislation to establish a robust asset seizure and 
forfeiture regime; 
--a pending law to put in place the procedures needed to 
comply with UN Security Council resolutions regarding the 
freezing, seizing and confiscation of suspected terrorist 
assets and to require suspicions of terrorist financing to 
be reported to the FIU. 
 
¶24.  On an operational level, necessary improvements 
include:  Rather than address only specific tasks, the PCG 
should meet on a regular basis to discuss issues and 
projects to enhance the GOS' AML/CTF regime. The PCG should 
work to improve interagency coordination to improve 
information sharing, record keeping and statistics. And the 
GOS should ensure that sufficient resources are available 
for its law enforcement agencies to work effectively and 
efficiently. 
 
POLT