VZCZCXYZ0013
RR RUEHWEB

DE RUEHBW #1709/01 3541443
ZNR UUUUU ZZH
R 201443Z DEC 07
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 1943
RUEAWJA/DEPT OF JUSTICE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS BELGRADE 001709 
 
SIPDIS 
 
SIPDIS 
FOR INL, SCT, EEB, EUR/SCE, EUR/PGI 
DEPT OF JUSTICE FOR AFMLS, OIA, OPDAT 
TREASURY FOR FINCEN 
 
E.O. 12958: N/A 
TAGS: KCRM EFIN KTFN SNAR SR
SUBJECT: SERBIA: 2007-2008 INCSR II ON MONEY LAUNDERING 
 
REF: State 138130 
 
SUMMARY 
------- 
 
¶1.  Reftel requested post update for Serbia on efforts to combat 
money laundering and terrorist financing.  Serbia is upholding all 
international commitments to eliminate money laundering and 
terrorist financing.  END SUMMARY. 
 
SERBIA: Not a Financial Center 
------------------------------ 
 
¶2.  Serbia is not a regional financial center. At the crossroads of 
Europe and on the major trade corridor known as the "Balkan route," 
Serbia confronts narcotics trafficking, smuggling of persons, drugs, 
weapons and pirated goods, money laundering, and other criminal 
activities. Serbia continues to be a significant black market for 
smuggled goods. Illegal proceeds are generated from drug 
trafficking, corruption, tax evasion and organized crime, as well as 
other types of crimes. Proceeds from illegal activities are invested 
in all forms of real estate. Trade-based money laundering, in the 
form of over- and under-invoicing, is commonly used to launder 
money. 
¶3.  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 Cyprus According to Government of the Republic of 
Serbia (GOS) officials, much of the difference is due to payments 
made to accounts in Cyprus for goods, such as Russian oil, that 
actually originate in a third jurisdiction. 
 
Banking Sector Largely Foreign Owned 
------------------------------------ 
 
¶4.  Serbia's banking sector is more than 80 percent foreign-owned. 
There is no provision in the banking law that allows the 
establishment of offshore banks, shell companies or trusts. 
Reportedly, there is no official evidence of any alternative 
remittance systems operating in the country; however, there is 
anecdotal evidence. Nor, reportedly, is there evidence of financial 
institutions engaging in currency transactions involving 
international narcotics trafficking proceeds. Serbia has 14 
designated free trade zones, three of which are in operation. The 
free trade zones were established to attract investment by providing 
tax-free areas to companies operating within them. These companies 
are subject to the same supervision as other businesses in the 
country. 
 
Anti-Money Laundering Law 
------------------------- 
 
¶5.  In September 2005, Serbia codified an expanded definition of 
money laundering in the Penal Code. This legislation gives police 
and prosecutors more flexibility to pursue money laundering charges, 
as the law broadens the scope of money laundering and aims to 
conform to international standards. The penalty for money laundering 
is a maximum of 10 years imprisonment. Under this law and attendant 
procedure, money laundering falls into the serious crime category 
and permits the use of Mutual Legal Assistance (MLA) procedures to 
obtain information from abroad. 
 
¶6.  On November 28, 2005, Serbia adopted a revised anti-money 
laundering law (AMLL), replacing the July 2002 Law on the Prevention 
of Money Laundering. The revised AMLL expands the number of entities 
required to collect certain information on all cash transactions 
over EUR 15,000 (approx. $21,750), or the dinar equivalent, and to 
file currency transaction reports (CTRs) for all such transactions 
exceeding this threshold with the financial intelligence unit (FIU). 
Suspicious transactions in any amount must be reported to the FIU. 
The law also expands those sectors subject to reporting and record 
keeping requirements. Banks, attorneys, auditors, tax advisors and 
accountants, currency exchanges, insurance companies, casinos, 
securities brokers, dealers in high value goods, real estate 
agencies and travel agents are required to comply with the AMLL 
provisions. Required records must be maintained for five years. 
These entities are protected with respect to their cooperation with 
law enforcement entities. The AMLL requires obligated entities and 
individuals to monitor customers' accounts when they have a 
suspicion of money laundering, in addition to reporting to the FIU. 
The AMLL 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. 
 
Law on Foreign Exchange 
----------------------- 
 
¶7.  The Law on Foreign Exchange Operations, adopted in 2006, 
criminalizes the use of false or inflated invoices or documents to 
affect 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 
currency (foreign or dinars), or securities in amounts exceeding EUR 
5,000 ($7,250) being transported across the border. The Foreign 
Currency Inspectorate, part of the Ministry of Finance, is 
responsible for supervising import/export companies for compliance. 
 
¶8.  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. In June 2006, the NBS expanded 
its customer identification and record keeping rules by adopting new 
regulations mandating enhanced due diligence procedures for certain 
high risk customers and politically exposed persons. Similar 
regulations are being developed 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 is still building the capacities needed for effective bank 
supervision through training and staff development. 
 
¶9.  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 being developed. 
 
Financial Intelligence Unit in Place 
------------------------------------ 
 
¶10.  The Administration for the Prevention of Money Laundering 
serves as Serbia's FIU. The revised AMLL elevates the status of the 
FIU to that of an administrative body under the Ministry of Finance. 
This provides more autonomy for the agency to carry out its mandate, 
as well as additional resources. One important change is that the 
FIU now has its own line item operating budget. The FIU currently 
has 24 employees. In accordance with the revised AMLL, the FIU 
developed listings of suspicious activity red flags for banks, 
currency exchange offices, insurance companies, securities brokers 
and leasing companies. Other significant changes include the 
authority of the FIU to freeze transactions for a maximum of 72 
hours. The FIU has signed memoranda of understanding (MOU) on the 
exchange of information with the NBS and Customs and is negotiating 
one with the Tax Administration. 
 
¶11.  For year-to-date, through November 19, 2007, the FIU received 
1,572 suspicious transaction reports (STRs). Virtually all of the 
STRs received by the FIU have been filed by commercial banks. 
Currency exchange offices have filed only seven STRs, all prior to 
¶2004. In 2007, the FIU has opened 46 cases; 119 cases were referred 
to law enforcement, investigative agencies or the prosecutor's 
office for further investigation.  A total of six criminal charges 
have been submitted for money laundering violations this year. The 
most common predicate crime is "abuse of office". One final sentence 
has been issued in 2007. 
 
VAT 
--- 
 
¶12.  Serbia introduced a value-added tax (VAT) 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 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. 
 
¶13.  The difficulty of convicting a suspect of money laundering 
without a conviction for the predicate crime 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 
Suppression of Organized Crime Service (SOCS) of the Interior 
Ministry houses an Anti-Money Laundering Section to better focus 
financial investigations. 
Interagency Working Group Established 
------------------------------------- 
 
¶14.  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. Subgroups have 
been tasked with drafting amendments to the AMLL that will bring the 
country's laws into compliance with the EU Third Directive on Money 
Laundering and with estimating the budget necessary to effectively 
implement the new law when it is enacted. The PCG and the working 
groups meet intermittently as required for completing specific 
tasks. The government still needs better, more consistent 
interagency coordination to improve information sharing, record 
keeping and statistics. 
 
¶15.  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 FIU is charged with 
enforcing the UNSCR 1267 provisions regarding suspected terrorist 
lists. A draft law on terrorist financing, now pending Parliamentary 
approval, will apply all provisions of the AMLL to terrorist 
financing, require reporting to the FIU of transactions suspected to 
be terrorist financing and will create mechanisms for freezing, 
seizing and confiscation of suspected terrorist assets based on 
UNSCR provisions. Although the FIU routinely provides the UN list of 
suspected terrorist organizations to the banking community, 
examinations for suspect accounts have revealed no evidence of 
terrorist financing within the banking system or any official 
evidence of alternative remittance systems. The SOCS, the Special 
Anti-Terrorist Unit (SAJ), and Gendarmarie, in the Interior 
Ministry, are the law enforcement bodies responsible for planning 
and conducting the most complex antiterrorism operations. SOCS 
cooperates and shares information with its counterpart agencies in 
all of the countries bordering Serbia. Although Serbia has 
criminalized the financing of terrorism, 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 draft legislation. 
 
Cooperation with Others 
----------------------- 
 
¶16.  Serbia has no laws governing its cooperation with other 
governments related to narcotics, terrorism, or terrorist financing. 
Bases for cooperation include 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. 
 
¶17.  Serbia does not have a mutual legal assistance arrangement with 
the United States, but information exchange via a letter rogatory is 
standard. The 1902 extradition treaty between the Republic of Serbia 
and the United States remains in force. The GOS has bilateral 
agreements on mutual legal assistance with 31 countries. As a member 
of the Council of Europe, the GOS is an active member of the 
Council's MONEYVAL. In July 2003, the FIU became a member of the 
Egmont Group and actively participates in information exchanges with 
counterpart FIUs including FinCEN. The Serbian FIU has also signed 
information sharing memoranda of understanding (MOUs) with 
Macedonia, Romania, Belgium, Slovenia, Montenegro, Albania, Georgia, 
Ukraine, Bulgaria, Croatia, and Bosnia and Herzegovina. Serbia is a 
party to the 1988 UN Drug Convention and the UN Convention against 
Transnational Organized Crime. The GOS also is a party to all 12 UN 
Conventions and 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. In December 2005, the 
GOS ratified the UN Convention against Corruption. 
 
Next Steps 
---------- 
 
¶18.  Serbia should continue to work toward eliminating the abuses of 
office and culture of corruption that enables money laundering and 
financial crimes. Among the pending legislative initiatives to make 
Serbia fully compliant with international standards are laws 
providing for the liability of legal persons for money laundering 
and terrorist financing; regulations to apply all requirements of 
the AMLL to covered non-bank financial institutions; legislation to 
establish a robust asset seizure and forfeiture regime; and 
legislation providing for the sharing of seized assets. Serbia also 
needs to enact and implement proposed legislation needed to comply 
with UN Security Council resolutions regarding the freezing, seizing 
and confiscation of suspected terrorist assets and require 
suspicions of terrorist financing to be reported to the FIU. 
 
¶19.  The National Bank and other supervisory bodies need training 
and additional staff. The GOS should enforce regulations pertaining 
to money service businesses and obligated non-financial businesses 
and professions. The supervisory scheme should be completed, and 
implementing regulations should be binding, for the insurance and 
securities sectors. On an operational level, law enforcement needs 
audit and investigative capacity in order to investigate the STRs 
that the FIU disseminates. Training is also required for prosecutors 
and judges. Rather than address specific tasks as an ad hoc group, 
the PCG should meet on a regular basis to discuss issues and 
projects, and work to improve interagency coordination in such areas 
as information sharing, record keeping and statistics. 
 
Comment 
------- 
 
¶20.  Serbia is upholding all international commitments to eliminate 
money laundering and terrorist financing.  Serbia continues to 
strengthen its anti-money laundering and terrorist financing law 
enforcement with the help of U.S Department of Justice and 
Treasury's Embassy-based personnel from whom Serbian authorities 
have received training in organized crime investigation, 
prosecution, and adjudication.  End Comment. 
 
MUNTER