R 290736Z NOV 07
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 8373
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEAWJA/DEPT OF JUSTICE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 04 ZAGREB 001044 
 
SIPDIS 
 
DEPT FOR INL, EB/ESC/TFS, AND EUR/SCE 
JUSTICE FOR OIA AND AFMLS 
TREASURY FOR FINCEN 
 
E.O. 12958: N/A 
TAGS: EFIN KCRM KTFN HR
SUBJECT: CROATIA 2007 INCSR REPORT - PART II: FINANCIAL CRIMES AND 
MONEY LAUNDERING 
 
REF: STATE 138204 
 
¶1.  Below is post's submission per reftel of part II of the INCSR on 
money laundering. 
 
¶2.  Croatia is a middle income transition economy that is neither a 
financial center nor a venue of choice for money laundering 
activities. Tourism and services make up the largest portion of GDP. 
  Croatian authorities consider that most money laundering is linked 
to domestic criminal activity, frequently to drugs or to various 
"economic crimes," such as fraud and tax evasion. 
 
¶3.  Croatian authorities are concerned about the use of Croatia's 
ports and borders for the smuggling of black market goods and are 
working with, among others, the Export Border Security office to 
tighten controls and screening.  However, Croatia does not represent 
a sizeable market for smuggled goods and is used primarily as a 
transit route for goods destined for other countries in the region. 
Between January and July 2007, Customs seized 54 containers and 
destroyed the contents of 27 containers. The greatest number of 
seizures occurred in the ports of Split, Rijeka and Ploce. 
 
¶4.  Croatia's banking sector is over 90 percent foreign-owned, with 
large Italian and Austrian banks dominating the market.  There are 
no offshore financial institutions and there is no evidence of any 
alternative remittance systems operating in the country. 
 
¶5.  Croatia has 15 free zones, 13 of which are in operation.  The 
free zones were designed to attract investment.  Companies operating 
in the zones benefit from lower profit taxes and customs and 
value-added free import of input materials.  These companies are 
subject to the same regulation and supervision as other businesses 
in the country.  There is no evidence that these zones are used for 
trade-based money laundering schemes or for terrorist financing. 
 
¶6.  Croatia criminalized money laundering in Article 279 of its 
penal code in 1996.  In 1997, Croatia passed its Law on the 
Prevention of Money Laundering (LPML), requiring banks and non-bank 
financial institutions to report transactions that exceed 
approximately USD 30,000, as well as any cash transactions that seem 
suspicious. Aside from cash, the LPML also requires covered entities 
to report all transactions involving gold, precious metals, and 
stones, as well as other types of monetary instruments and financial 
paper.  In 2000, Croatia's Parliament strengthened the country's 
penal code to ensure that all indicted individuals could be charged 
with the money laundering offense where applicable.  Prior to this 
change, a person could not be charged with money laundering if the 
predicate offense carried a maximum penalty of fewer than five years 
in prison. 
 
¶7.  Croatia continued the development of its anti-money laundering 
regime in subsequent years. In 2003, Parliament approved the new Law 
on the Prevention of Money Laundering (new LPML) that follows the 
European Union (EU) Directives. The new law also incorporates 
terrorism financing as well as drug smuggling and trafficking in 
persons, and requires that all cross-border transactions with cash 
or monetary instruments exceeding USD 6,500 be reported to Croatia's 
Financial Intelligence Unit (FIU).  The new LPML also expands the 
list of entities subject to reporting requirements, including 
lawyers and notaries. During 2007, the Croatian National Bank 
drafted guidelines to include anti-money laundering directives as 
well as a manual for supervision that includes specifics for 
anti-money laundering. 
 
¶8.  Through its regulatory authority, the Ministry of Finance 
requires financial institutions to use specific software to 
facilitate compliance with reporting requirements. Cooperation with 
regulators is generally good, with major financial institutions 
readily cooperating with Croatian authorities.   Financial 
institutions are required to maintain transaction and customer 
identification records for a period of five years.  Money exchange 
houses are licensed and operate as outposts of banks, with rates 
tied to those offered by the banks. 
 
¶9.  Croatia's FIU, the Ured za Sprjecavanje Pranja Novca (Anti-Money 
Laundering Department or AMLD), within the Ministry of Finance, has 
19 of its possible 22 positions filled. In order to satisfy 
conditions set in the Anti-Money Laundering Action Plan, a total of 
36 positions must be filled by the end of 2007. During 2006, a total 
of 2741 Suspicious Transaction Reports (STRs) were received.  The 
AMLD opened 281 new analytical cases based on 136 STRs received from 
the financial sector, 97 from law enforcement and supervisory 
agencies and 48 based on requests from foreign FIUs. Upon completion 
of analysis, 87 cases were sent for further investigation and 
action. During the first 11 months of 2007, 2131 STRs were received 
and 288 analytical cases were opened, of which 151 were based on 
financial institution STRs, 100 from law enforcement and supervisory 
agencies and 37 were based on requests from foreign FIUs. Once 
analysis was completed for the 2007 cases, 79 of them were forwarded 
for further action. 
 
¶10.  In 2001, the GOC established a National Center for the 
Prevention of Corruption and Organized Crime (USKOK) within the 
State Prosecutor's Office. This office has the authority to freeze 
assets, including securities and real estate, for up to a year. The 
office also has enhanced powers to seek financial transaction 
information and to coordinate the investigation of financial crimes. 
In October 2004, the Parliament revised the law governing USKOK's 
work. The revisions strengthen the tools USKOK can use to combat 
organized crime and grant USKOK jurisdiction to investigate 
narcotics-linked organized crime cases. 
 
¶11. An inter-institutional working group for the prevention of money 
laundering and terrorist financing began work on March 1, 2007. The 
working group includes representatives from 11 governmental 
institutions and agencies involved in the anti-money laundering 
system (Ministry of Justice, State's Attorneys Office, Ministry of 
Interior, five offices from Ministry of Finance, Croatian Financial 
Services Supervisory agency, Croatian National Bank and Security 
Intelligence Agency). Their objectives include defining and working 
through weaknesses and risks at the prevention level as well as 
removing obstacles that deter from effective prevention. The 
Croatian Financial Services Supervisory Agency and Croatian National 
Bank have also established joint committees for coordinating money 
laundering related issues and members of those committees are also a 
part of the Croatian MONEYVAL delegation. 
 
¶12.  Croatia has a history of strict separation of operations in 
justice and law enforcement. Responsibility for investigating 
financial crimes remains divided between the police, prosecutor's 
office, and the ministry of finance.  The AMLD investigates 
suspected money laundering, but does not have law enforcement 
authority.  Cases that show likely criminal activity are forwarded 
to the national police, who then open a new, criminal investigation 
of the charges.  This division of responsibility is partially 
responsible for slowing criminal proceedings, as investigative work 
is duplicated and the police lack the analytical capacity to 
thoroughly investigate complex financial transactions. 
 
¶13.  There have been relatively few actual convictions for money 
laundering in Croatia - 13 persons have been convicted for money 
laundering since 1997. Of the 13, eight were incarcerated for money 
laundering crimes valued at approximately 845,000 HRK ($169,000) in 
¶2007.  The AMLD attributes this apparent increase in money 
laundering convictions to the "Prevention of and combat against 
money-laundering" CARDS program that started in 2006. However, 
despite improved inter-ministerial cooperation, significant 
shortcomings persist, including continued weak interagency 
cooperation, inadequate technical skills of the police and 
prosecutors when analyzing and dealing with complex financial crimes 
and a general lack of knowledge among members of the banking 
community as to what exactly constitutes a money laundering offense. 
Although the judicial backlog has been cut from 1.4 million cases to 
one million, understaffing, exceedingly long court proceedings and 
severe resource constraints hamper the effective prosecution of 
criminal cases. 
 
¶14.  Although Croatian investigators have the authority to 
temporarily seize property in the course of an investigation, asset 
seizure legislation needs strengthening in cases of money 
laundering. Croatian legislation provides that, with regard to asset 
seizure, the burden falls on the state to prove that the property of 
a criminal was purchased with illegal proceeds. There is no civil 
asset forfeiture provision in Croatian law. Therefore, it is 
extremely difficult to seize assets absent a direct link between a 
specific crime and its proceeds.  The only exception to this is in 
the case of organized crime, where a 2006 amendment to the criminal 
code allows for the seizure of property of individuals connected to 
organized crime groups without establishing a specific relationship 
between the property and the crime. 
 
¶15.  Croatia's legal framework to address terrorist financing is 
more robust than for money laundering. In 2003 Croatia UN Convention 
Against Corruption and the International Convention for the 
Suppression of the Financing of Terrorism in its national law and 
the state administration has set up procedures their implementation. 
An inter-ministerial working group meets regularly to share 
information on terrorism financing, including the circulation 
throughout its financial system of all international lists of 
designated individuals and entities. Authorities have the right to 
identify and, with a court order, to freeze and seize terrorist 
finance assets. Law enforcement authorities are able to move quickly 
to seek the required court order to freeze suspect accounts and 
assets of those individuals or organizations named by the UNSCR 1267 
Sanctions Committee. In contrast to other crimes, Croatian law 
enforcement officials have greater authority to freeze assets linked 
to individuals and entities included in UNSCRs 1267, 1333, and 1390. 
 
¶16.  The AMLD can freeze assets on its own administrative authority 
for 72 hours. However, obtaining an extension of the initial 72-hour 
period is more complicated, with the Prosecutor's Office requiring 
either an international instrument or a formal legal request for an 
asset freeze. However, according to an AMLD representative, every 
request to extend an asset freeze has been granted per court order 
and remained in effect throughout the end of proceedings. In 2006, 
Croatian authorities froze the dormant accounts of two individuals 
connected to terrorist groups active in neighboring Bosnia and 
Herzegovina in the 1990s, in addition to 3 other account freeze 
orders. The AMLD ordered 4 asset freezes during the first three 
quarters of 2007. 
 
¶17.  In the international arena, the AMLD cooperates fully with 
foreign FIUs. Croatia does not have limitations on exchanging 
information with international law enforcement on money laundering 
investigations. Croatia actively cooperates with its Balkan 
neighbors in the law enforcement arena, especially in the fight 
against money laundering, where Croatia worked to establish a 
regional working group to address the issue.  Croatia signed 
bilateral agreements with Georgian, Ukrainian and Moldovan FIU 
counterparts in 2007 and is also party to a number of bilateral 
agreements on law enforcement cooperation with its neighbors, as 
well as the Southeastern Europe Cooperative Initiative's Agreement 
to Prevent and Combat Trans-border Crime. 
 
¶18.  In addition, Croatia is working in concert with Bosnia and 
Herzegovina to stem cross-border money laundering and smuggling. The 
joint efforts include the participation by authorities from both 
countries as well as the use of new technology and computer programs 
developed specifically for this purpose. With a thousand-mile border 
between the two countries, and numerous loopholes caused by the 
jurisdictional irregularities throughout Bosnia and Herzegovina, 
this is one of Croatia's most important projects. 
 
¶19.  In December 2004, Croatia joined 11 other regional prosecutors 
in signing a memorandum of understanding to work jointly to fight 
organized crime. Croatia also participates as a member in the EU's 
Community Assistance for Reconstruction, Development, and Assistance 
(CARDS) Program, which seeks to assist countries of the Western 
Balkans to achieve a greater level of EU integration. As part of the 
CARDS Program, in 2005 Croatia signed multilateral memorandum of 
understanding among the FIUs of Albania, Bosnia and Herzegovina, 
Serbia, Montenegro, and Macedonia. In 2006, the "Prevention of and 
combat against money-laundering" program began with Austrian 
twinning partners. 
 
¶20.  Croatia has also intensified its cooperation with Austria, 
Germany, Italy, and Slovenia regarding border control and crime. As 
a member of the Council of Europe's Select Committee of Experts 
(MONEYVAL), Croatia has participated in mutual evaluations with the 
other members, both by being evaluated, and by sending experts to 
evaluate the progress of other member states. Regionally, Croatia 
has assisted and supported the creation of anti-money laundering 
legislation and the establishment of FIUs in Albania, Macedonia, 
Serbia, and Bosnia and Herzegovina. Croatia is also an active member 
of the Egmont Group and sponsored the membership of Albania, 
Macedonia and Bosnia and Herzegovina. 
 
¶21.  The 1902 extradition treaty between the Kingdom of Serbia and 
the United States remains in force and applies to present-day 
extradition between Croatia and the United States. However, 
according to the Croatian Constitution, citizens of Croatia may not 
be extradited, except to The Hague for the War Crimes Tribunal. 
 
¶22.  Croatia is a party to the UN International Convention for the 
Suppression of the Financing of Terrorism and the UN Convention 
against Transnational Organized Crime. In April 2005 the GOC 
ratified the UN Convention against Corruption. Croatia also is a 
party to the 1988 UN Drug Convention; the Council of Europe 
Convention on Laundering, Search, Seizure, and Confiscation of the 
Proceeds from Crime; and the Convention on Transnational Organized 
Crime. In June 2003, Croatia signed the European Convention on the 
Transfer of Proceedings in Criminal Matters. 
 
¶23.  Although the Government of Croatia has the mechanisms in place 
to combat money laundering, efforts are hampered by an inability to 
recruit and retain highly skilled staff for its FIU, a lack of 
expertise in financial crimes among the police and judiciary and an 
overly burdensome asset forfeiture regime, problems to which the low 
number of convictions for money laundering bear witness.  With its 
EU accession process underway, Croatia is under greater scrutiny of 
its ability to successfully combat money laundering.  The current 
"twinning" project with the Austrian FIU is intended to boost 
capacity, but Croatia will need ongoing assistance until the various 
parts of its system can begin to work together to produce results. 
 
BRADTKE