Islamic Republic of Afghanistan
Detailed Assessment Report on Anti-Money Laundering and Combating the Financing of Terrorism

Afghanistan is one of the poorest countries in the world and, after decades of ongoing conflicts and strife, it is still at an early stage of developing its legal and institutional framework. Measures have been taken to fight crime, including financial crime. Smuggling and fraud are other major sources of illegal funds. In addition, terrorism and its financing remain a major concern. A framework has been established to allow for international mutual legal assistance but it falls short of the standard and is rarely used.

Abstract

Afghanistan is one of the poorest countries in the world and, after decades of ongoing conflicts and strife, it is still at an early stage of developing its legal and institutional framework. Measures have been taken to fight crime, including financial crime. Smuggling and fraud are other major sources of illegal funds. In addition, terrorism and its financing remain a major concern. A framework has been established to allow for international mutual legal assistance but it falls short of the standard and is rarely used.

1. GENERAL

1.1. General Information on the Islamic Republic of Afghanistan

Background information

Geography

28. Afghanistan is a mountainous, landlocked country in Southwest Asia. Kabul is its capital. Approximately half of its territory is over 2,000 meters above sea level. Its total surface area is 652,865 km. It is bordered by Turkmenistan, Uzbekistan, and Tajikistan to the north, China to the east, Pakistan to the east and south, and Iran to the west. The total length of its land boundaries is 5,529 km: 744 km are shared with Turkmenistan, 137 km with Uzbekistan, 1,206 km with Tajikistan, 76 km with China, 2,430 km with Pakistan, and 936 km with Iran.

Demography

29. The country has 29,802,724 inhabitants, as of 2009. The Afghan population is composed of different ethnics groups speaking different languages. The largest ethnic groups are Pashtun (42%), Tajik (27%), Uzbek (9%), and Hazara (9%). Other, smaller groups account for about 13% of the population. They are Turkmen, Aimaq, Baluch, Nuristani, and Kizilibash. The predominant religion is Sunni Islam (80%); the remainder of the population (19%) is Shiite.

History

30. Afghanistan, often called the crossroads of Central Asia, has a turbulent recent history.1 On July 17, 1973, former Prime Minister Daoud seized power in a military coup amid charges of corruption against the royal family and poor economic conditions. By the summer of 1978 however, a revolt began in the Nuristan region of eastern Afghanistan and quickly spread into a countrywide insurgency. In spite of a bilateral treaty of friendship and cooperation between the Soviet Union and Afghanistan signed in December 1978, by October 1979 relations between the two countries were tense. Faced with a deteriorating security situation, on December 24, 1979, a large number of Soviet troops entered Kabul. Although informal negotiations for a Soviet withdrawal from Afghanistan had started as early as 1982, it was only in 1988, when the Geneva accords were signed, that a timetable for full Soviet withdrawal from Afghanistan (by February 15, 1989) was set in motion.

31. The Mujahideen2 were party neither to the negotiations leading to the 1988 agreement nor to the agreement itself and, consequently, refused to accept the terms of the accords. As a result, the civil war continued after the Soviet withdrawal, which was completed in February 1989. The Taliban movement3 gained strength in the mid-1990s in reaction to the anarchy and warlordism that arose after the withdrawal of the Soviet forces. By September 1996 they had taken Kabul and won control of most of the country. An opposition called the Northern Alliance held out in the north of the country.4

32. Following the terrorist attacks of September 11, 2001 and the Taliban’s refusal to expel Osama bin Laden and his key supporters, the United States (US) and its partners in the anti-terrorist coalition began a military campaign on October 7, 2001, targeting terrorist facilities and various Taliban military and political assets within Afghanistan, leading to the fall of the Taliban regime. Under the “Bonn Agreement,” an Afghan Interim Authority was formed and took office in Kabul on December 22, 2001 with Hamid Karzai as its Chairman. At the same time, the United Nations Security Council authorized the establishment of an International Security Assistance Force (ISAF) to help the Authority maintain security in Kabul and its surrounding areas.

33. A new constitution was drafted, and ratified on January 3, 2004, Presidential elections were held in October 2004 and Hamid Karzai was inaugurated as President of the newly renamed Islamic Republic of Afghanistan on December 7, 2004 for a term of five years. Due to the security situation however the first parliamentary elections, originally scheduled for June 2004, were held on September 18, 2005. The second presidential and provincial council elections were held in August 2009, and National Assembly elections were held only on September 2010. On November 2, 2009, officials of the Independent Election Commission (IEC) declared Hamid Karzai President of Afghanistan for another 5-year term.5 Despite these progresses, the rule of law is still not upheld in the entirety of the country, as the central power is challenged by warlords in some regions, and combated by Taliban in others.

34. As the brief historical account above shows, Afghanistan has witnessed instability and conflicts during most of the last 40 years. Such a situation challenged economic and social development of the country, contributed to the flourishing of the criminal activities and prevented the development of the structural elements (e.g. transparency and good governance, a culture of AML/CFT compliance, appropriate measures to combat corruption, functioning institutions including an efficient court system, high ethical and professional standards for public officials and professionals) which underpin any effective AML/CFT framework.

System of government

35. Afghanistan’s current institutional framework is recent. The Constitution of January 3, 2004 provides for a tripartite system of government, with a President, Ministers working under the chairmanship of the President, a National Assembly composed of the House of People (lower house) and the House of Elders (upper house) and a judiciary, which is comprised of the Primary Courts, Courts of Appeal and the Supreme Court. It also provides for the Loya Jirga (Grand Council), composed of the members of the National Assembly as well as of the presidents of the provincial and district assemblies.

President

36. The President is the head of state and he leads the executive branch of government. The President is the sole executive for Afghanistan and is aided by a first and second Vice-President. The President, among other duties, is responsible for commanding the armed forces of Afghanistan, convening the Loya Jirga, and appointing ministers and members of the Supreme Court. The president is charged with, and must abide by, the limitations of the Constitution.

37. The rights and obligations of the President are set out in Article 64 of the 2004 Constitution. The President has limited legislative powers when Parliament is in recess under Article 79 of the Constitution.

38. The Ministers are appointed by the President, with the endorsement of the House of People (Article 64 (11) of the Constitution). At the time of the onsite mission, there were 25 ministries charged with carrying out laws passed by the National Assembly, and drafting regulations.

National Assembly

39. The National Assembly is Afghanistan’s national legislative branch. It is a bicameral body, comprising of two chambers:

  • 1. The Wolesi Jirga or House of People: this is the lower house composed of 250 members, directly elected;

  • 2. The Meshrano Jirga or House of Elders: this is the upper house composed of 102 members. Two thirds of the members are indirectly elected by members of district and provincial councils, the other third is appointed by the President.

40. The National Assembly is charged with passing, modifying, and abrogating laws, and with approving the government budget. It must also receive the legislative decrees issued by the President under Article 79 of the Constitution when Parliament is in recess and has the power to reject them (in which case they become void). While the House of People has the main law-making responsibility in the country, the House of Elders has an advisory more than a consultative role (although it has some veto powers). Laws must be accepted by both houses and signed by the President for it to enter into force. The House of People has also the power of accepting or rejecting presidential appointments for the ministries and Supreme Court.

Loya Jirga

41. The Grand Council (Loya Jirga) is composed of all members of the National Assembly and the chairpersons of the provincial and district councils. The Loya Jirga has very specific powers. It may amend the Constitution, make decisions on the territorial integrity and independence of the country, and prosecute the President.

Supreme Court

42. The Supreme Court (Stera Mahkama) is the highest judicial organ in Afghanistan and is headed by a Chief Justice who decides cases with the eight other justices of the court. Its nine members are appointed by the President with the consent of the House of People for ten year terms. The Supreme Court, like the other courts in Afghanistan, is divided into four sections: general criminal, public security, civil and public rights, and commercial. Each section is headed by one justice who is in charge of all the cases in that subject area.

43. The powers of the Supreme Court are provided for in Article 24 of the Law of the Courts. This provision in particular gives the power to review laws passed by the National Assembly for compliance with the Constitution and Afghanistan’s international agreements. The Supreme Court can also propose laws related to judicial affairs to the National Assembly.

Structural elements for an effective AML/CFT system

Criminal legal framework and justice system

44. Afghanistan’s legal framework and justice system are still at an early phase of establishment and implementation. The institutional reform, and the revision of the legal framework, started very shortly after the collapse of the Taliban regime, notably with the January 2002 International Conference on Reconstruction Assistance to Afghanistan. A few donor countries and several international organizations initiated projects aimed at reforming and rebuilding the criminal justice framework. The United Nations Office on Drugs and Crime (UNODC), in particular, focused on reviewing national criminal laws and procedures, and on strengthening the judiciary.

45. These efforts entailed a search for and review of legal texts that existed prior to the Taliban regime and that could still be used. In many instances, they also entailed the drafting and issuance by the Afghan authorities of new legislative texts. Several agencies were established to create a new framework to fight against the main asset generating crimes and money laundering. They include the Major Crime Task Force (MCTF), Sensitive Investigation Unit (SIU) and Investigation and intelligence Unit (IIU) that were established within the Ministry of Interior, the National Department of Security (NDS), the Anti-Corruption Unit of the Attorney General’s Office, and the Anti-Corruption Court and Counter-Narcotics Court (both established within the Supreme Court). Most of these agencies were set up with the assistance of foreign donor countries, some of which still maintain a presence for training purposes.

46. Criminal procedure in general lacks clarity. Procedural elements are spread out in various texts, and it is unclear if all of them are still in force.

47. Due to the actions of the insurgency which persists in most provinces of Afghanistan, the authorities are not in a position to investigate, prosecute and sanction crime (including money laundering and terrorist financing) throughout the entirety of the Afghan territory. In addition, the low levels of human capital, and the persistence of the traditional patronage systems have hampered the enforcement of the rule of law.

48. Finally, it is worth mentioning, that, in parallel to the formal justice system, Afghanistan has a long standing tradition of non-State justice systems, i.e. local (or tribal) systems of justice and mediation. Several studies have been conducted on the relationship between the two systems, and according to some, most disputes, both criminal and civil, are resolved outside Afghanistan’s formal justice system 6. The non-State judicial systems are however mainly dedicated to the resolution of personal disputes and do not address crimes of national concern, such as money laundering and terrorist financing. They are therefore not the object of the present assessment.

Transparency, good governance, measures to combat corruption

49. Corruption is widespread in Afghanistan. Afghanistan ranks third to last in the 2010 Transparency International Corruption Perception Index (176 out of 178 jurisdictions), thus classifying it as the third most corrupt country in the world. According to a recent UNODC study, corruption is a routine activity in the country when dealing with public officials: 52% of adult Afghans had to pay at least one bribe to a public official during the last 12 months.7 As shown by the pie chart below, judges, prosecutors, customs, and police officers together account for 45% of all bribes of $1,000 or higher.

Figure 1
Figure 1

Percentage distribution of bribes by requesting public official8

Citation: IMF Staff Country Reports 2011, 317; 10.5089/9781463923938.002.A001

Note: bribe of $1,000 and more

50. Afghans have little confidence that the authorities are tackling the problem. “[O]nly 9% of the urban population has ever reported an act of corruption to authorities.” A majority of Afghans feel discouraged to report unlawful behaviors to people who are seen as being part of the problem (63% of responses).9 Along the same lines, a vast majority of the population (84%) perceived that the court system is corrupt and unfair.10

51. Bribery is a predicate offense to money laundering. Afghanistan signed and ratified the United Nations Convention against Corruption on August 25, 2008. Afghanistan adopted a detailed “strategy and policy for anti-corruption and administrative reform.” In July 2008, the President issued a Decree establishing a High Office for Oversight and Anti-Corruption (HOO) as the highest office for the coordination and monitoring of the implementation of Afghanistan’s anti-corruption strategy and for the implementation of administrative procedural reform in the country. Pursuant to Article 154 of the Afghan Constitution, asset disclosure is mandatory for the President, Vice-President, Ministers, the Attorney General and members of the Supreme Court. The Law on Monitoring the Anti-Administrative Corruption Strategy extends the disclosure requirements to other officials, including “staff working in second grade and higher and employees who work in finance, accounting and procurement sections, prior to occupation of their positions” (Article 12).

Legal framework for AML/CFT

52. Afghanistan started taking steps to fight money laundering in 2004 (i.e. prior to the establishment of Parliament) with the issuance of a legislative decree entitled the “Anti-Money Laundering and Proceeds of Crime Law” (Law No.840, hereafter the AML LD). The purpose of the decree is “to prevent and prohibit the use of financial institutions and any economic activities for money laundering and for the financing of terrorism” (Article1).

53. According to the authorities, the decree was issued under Article 79 of the 2004 Constitution, which enables the government to issue legislative decrees “during the recess of the House of Representatives”, and “in case of an immediate need (…) except in matters related to budget and financial affairs.” Pursuant to this same provision, legislative decrees acquire force of law after they have been endorsed by the President. They must then be submitted to Parliament “within 30 days of convening its first session” and, if rejected by the National Assembly, they become void.

54. Article 79 of the Constitution only deals with “recess” of Parliament and does not address the situation that the authorities were facing in 2004, namely a nascent political system in which Parliament had not yet been established. Contrary to what the authorities maintain, it cannot constitute the basis for the AML LD. This interim situation in which the country found itself at the time (i.e. the period between the adoption of the Constitution and the inauguration of the National Assembly) is covered under Article 160, which provides that “pending the establishment of the National Assembly, its powers, enshrined in this Constitution, and shall be submitted to the government (…).” This provision therefore would appear to enable the President to issue legislative decrees until Parliament has been established. Pursuant to Article 161, the legislative decrees enforced from the beginning of the interim period must be referred to the first session of the National Assembly; these decrees are enforceable unless annulled by the National Assembly. Accordingly, while the decrees are enforceable upon signature by the President, they are nevertheless subject to final endorsement by Parliament. Although Article 160 has not been invoked by the authorities, it would appear to be the only possible basis for the issuance, by the President, of the AML LD in the period that preceded the convening of Parliament. Two days prior to the APG plenary discussion of the report, the Afghan authorities provided the assessment team with a letter from the House of People confirming that the AML LD had been transmitted to the National Assembly during its first session (which was inaugurated on December 2005), and that the procedural conditions set out in the Constitution had therefore been complied with. The letter also indicated however that, more than five years after the transmittal of the LD to Parliament, the latter still had not endorsed it. Consequently, the AML LD still does not have the full force and value of law.

55. In October 2006, the President also issued the “Law on combating the financing of terrorism”, which, despite its title, is also a LD. Like the AML LD, the CFT LD has been submitted to Parliament during its first session and, while enforceable under the provisions mentioned above, is still pending final endorsement by Parliament.

Ethical and professional standards

56. According to the recently adopted laws governing the work of these agencies, the law enforcement personnel of the Afghan National Police and of the Attorney General’s Office (AGO) are required to have high professional standards and qualifications. They are also subject to strict confidentiality rules. Merit-based processes for selecting police officers, judges and prosecutors and promotions have been introduced.

57. However, in many cases, these standards and ethical requirements are not implemented. In practice, several reports indicated that there is widespread “petty corruption” within the Ministry of Interior (MoI) and the Ministry of Justice (MoJ), and that police officers demand bribes from the public.11 According to the World Bank Report, the most serious corruption within the MoI, is the large-scale corruption linked to the drug trade. The report states that the MoI appoints chiefs of Police “to both protect and promote criminal interests. The result is a “complex pyramid of protection and patronage, effectively providing state protection to criminal trafficking activities.” Similar concerns have been raised with respect to AGO staff and judges.

58. Development and implementation of codes of conducts and good practices for professions such as accountants, auditors and lawyers are at an early stage. To date, only the bar association has adopted a code of conduct, in July 2009.

Economy

General information

59. Afghanistan is one of the poorest countries in the world, with a per capita income estimated at about US$500, and the country ranks well below its neighbors on most human development indicators. The economy remains heavily dependent on inflows of foreign aid to finance the government budget and cover the massive current account deficit. According to the Ministry of Finance, in early 2011, 40% of the operating budget and 100% of the development budget was financed by the international community. The most important economic activity in Afghanistan is the illegal cultivation of opiates and the production of opiates, combined with the cultivation of cannabis and the production of cannabis resin.

60. The Afghan economy is dominated by agriculture, including the cultivation of opiates and cannabis, although only 12% of the country’s total land area is classified as arable, while one-half of that is cultivated, due to the lack of irrigation. Afghanistan depends to a large extent on melting snows to provide irrigation water, but has experienced several years of droughts over the last decade due to low snowfall. Afghanistan’s mining industry is still largely informal, characterized by small scale, undercapitalized operations. To date only few deposits have been exploited (including gas, coal, copper and precious minerals). According to the World Bank, if managed properly mining has the potential to be a driver of poverty reduction and sustained growth,12 as the country hosts among the largest unexplored copper and iron deposits in the world. Manufacturing has recovered since 2001, but remains hampered by poor security and a lack of materials. Most factories are located in Kabul and a few other major cities, including Herat and Mazar-i-Sharif. The service sector has developed rapidly since 2001, fueled by significant aid inflows, as well as the proceeds of crimes including drug trafficking and corruption (see below).

61. Between 2007 and 2010, economic growth averaged about 12 percent per year. However, this growth has been volatile, ranging from 3percent in fiscal year 2008 /09 to 21 percent in 2009 /10, thanks to a record harvest and a booming service sector. The authorities managed to undertake a successful disinflation after domestic prices surged in 2008 due to historically high world commodity prices. Government revenues are among the lowest in the world at under 11percent of GDP in 2010 /11. Consequently, with total spending in excess of 20 percent of GDP, the government is reliant on donors’ inflows.

62. A total of US$286.4 billion (US$9,426 per Afghan citizen) has been spent since late 2001on security, military resources and international aid in Afghanistan.13 These inflows, along with illicit financial flows from the narcotic sector, have stimulated sales of domestic goods and services to nonresidents and contributing to a buildup of international reserves and a stronger Afghani. Interestingly, even with the severe banking crisis which has been developing since the summer of 2010, the domestic currency did not depreciate yet, particularly thanks to external inflows.

Figure 2:
Figure 2:

International aid, security and military expenditure, 2002-2009.14

Citation: IMF Staff Country Reports 2011, 317; 10.5089/9781463923938.002.A001

Trade flows

63. Afghanistan’s total trade in 2005 was estimated by the Central Statistics Office (CSO) at US$5.4 billion, comprising about US$3.9 billion in imports and US$1.7 billion in exports (of which around US$1.2 billion represent re-exports). Exports comprise mainly carpets, dried fruits, nuts, sheepskins, and precious stones. Pakistan is the major destination of Afghanistan’s exports and re-exports (electronics, cosmetics, toiletries, crockery, and auto parts). Recorded imports represent 50 percent of total imports, as smuggling is still prevalent with some neighboring countries, including Iran. Official imports come mainly from Japan, India, and Pakistan. While Pakistan was a major source of imports in the past, China and Japan are now Afghanistan’s main import partners, followed by India.15

64. Formal and legitimate trade is not the only one present in the country. Trade flows for illicit opiates are significant but are difficult to quantify, although information is available regarding the main opiates markets.16

Economic activity generated by the drug industry

65. Afghanistan is the largest producer of illicit opiates in the world. By the latter part of the 1990s, Afghanistan had become the main source of the world’s opium and heroin. By 2001, a Taliban ban on illicit poppy cultivation reversed a trend of increasing production since the late 1980s. However, after the fall of the Taliban regime, production picked up where it had left off,17 and has grown fairly steadily until the last few years.

66. In 2007, 92% of the opiates on the world market originated in Afghanistan.18 This amounts to an export value of about US$4 billion, with a quarter being earned by opium farmers and the rest going to district officials, insurgents, warlords, drug traffickers.19 The country accounted for 7% of total world demand, or 80 mt a year, for an estimated 150,000 users in 2008 (rising to 200,000250,000 in 2009). A large volume of opium is consumed in the Islamic Republic of Iran, approximately 450 mt, according to UNODC estimates. But all of Afghanistan’s neighbors report important levels of opium use. Excluding China, consumption in the countries bordering Afghanistan (the Islamic Republic of Iran, Pakistan, Tajikistan, Uzbekistan and Turkmenistan) is estimated at 650 mt per year, or 60% of global consumption. Although small-scale cultivation occurs in these countries, such as in Pakistan and Central Asia, the main supply source for the region’s opium consumers is Afghanistan.20

67. The magnitude and importance of Afghanistan’s opium economy are virtually unprecedented and unique in global experience—it has been roughly estimated as equivalent to 36% of licit (i.e. non-drug) GDP in 2004 /05, or if drugs are also included in the denominator, 27% of total drug-inclusive GDP. The size and illicit nature of the opium economy mean that it infiltrates and seriously affects Afghanistan’s economy and society.21

68. According to the Government of Afghanistan, the Ministry of Counter Narcotics and the United Nations Office on Drugs and Crime’s annual Afghanistan Opium Survey 2010 123,000 ha of opium were cultivated in the country in 2010, yielding 3,600 mt of opium with a farm gate value of US$605mn, equivalent to 5% of the Government’s GDP estimate for 2010. 22

69. The vast majority of cultivation, which only five years ago took place throughout the country, is now confined to 14 of the country’s 34 provinces. The Southern (84%) and Western (15%) provinces host 99% of opium cultivation. Of the 14 the major cultivating provinces, the top five are Hilmand (65,045 ha), Kandahar (25,835 ha), Uruzgan (7,337 ha), Dai Kundi (1,547 ha) and Zabul (483 ha). In 2009, 1.6mn people were involved in opium cultivation, equivalent to an estimated 248,700 households. Hilmand, were roughly 53% of the country’s opium is cultivated is one of the most insecure provinces in the country.

70. The Afghan drug industry has spillover effects in many countries around the world. A 2009 UNODC Report23 shows the adverse consequences that the 900 tons of opium and 375 tons of heroin, trafficked from Afghanistan every year, have on the health, security, and consequently economies of countries along the Balkan and Eurasian drug routes, all the way to Europe, Russia, India and China. Afghanistan’s drug production is responsible for a market worth US$65 billion.

71. As shown by Table 1 (Opium production in metric tons) below, opium production has steadily risen since the 1980s and peaked in 2006.

Table 1.
Table 1.

Opium production in metric tons

Citation: IMF Staff Country Reports 2011, 317; 10.5089/9781463923938.002.A001

Relationships between formal and informal/illegal economy

72. As noted above, Afghanistan is an extremely poor country, landlocked, and highly dependent of foreign aid, agriculture and trade with neighboring countries. Much of the population continues to suffer from shortages of housing, clean water, electricity, medical care, and unemployment. Most economic activity takes place in the informal and illegal sectors. Activities which take place in the formal sector are largely associated with government activities, aid, and the laundering of proceeds of crimes.

73. There are many interdependencies between the informal, the illegal and the formal economies. Market links exist through the provision of services, trade of goods, and acquisitions of skills and know-how. Informal actors provide services to formal actors on a sub-contracting basis. In addition, individuals can participate both in the formal, informal, and illegal economies.

74. Transactions in both the formal, informal and illegal sectors are mainly cash based, and take place in different currencies, which makes studying financial flows difficult. The World Bank estimates that between 80 and 90% of the economic activity in Afghanistan occurs in the informal sector.24

Figure 3.
Figure 3.

The informal economy in different sectors.25

Citation: IMF Staff Country Reports 2011, 317; 10.5089/9781463923938.002.A001

1.2. General situation of ML and FT

Information on predicate crime

Current situation and trends regarding predicate offenses

75. Various forms of proceeds-generating crimes are perpetrated in Afghanistan. These include, but are not limited to, drug trafficking, smuggling and corruption.

76. The main proceeds-generating crimes are drug-related offenses with proceeds estimated to US$4 billion in 2007. As noted above, Afghanistan is the world’s largest producer and exporter of opiates. It is also an important consumer. Moreover, by itself, Afghanistan produces 85% of the estimated global heroin and morphine supply, a near monopoly. Afghanistan is also a globally significant producer of cannabis and cannabis resin.

77. Drug cultivation and production is illegal in Afghanistan, which is signatory to all three international drug control conventions. Various government agencies in Afghanistan (e.g., the Ministry of Interior, the Afghan National Police and the Counter Narcotics Police, and the Sensitive Investigations Unit) conduct counter narcotics activities, as does ISAF. Counter narcotics efforts include seizures and destruction of clandestine laboratories by NATO/ISAF and/or Afghan National Police (ANP), as well as a government led eradication program. Since October 2008, consistent with the UN Security Council Resolutions, NATO Defense Ministers agreed that ISAF could work with the Afghan police and army against narcotics facilities and facilitators who support the insurgency.

Opiate Seizures in Afghanistan, 2003 - 2008, Kilograms

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78. In addition to drugs, smuggling of other goods is also a serious concern in Afghanistan. While precise figures are difficult to obtain, it is estimated that smuggling of various goods is an important source of income for criminals and the insurgency. Reports from the Khyber Agency in Pakistan indicate that smuggling of counterfeit cigarettes represent a potential loss of approximately $88 million in tax revenues for Pakistan every year.26 Cash smuggling from neighboring countries, and particularly from Pakistan to the United Arab Emirates through Afghanistan, constitutes a major source of proceeds laundered in Afghanistan. Based on interviews conducted by the mission it could count in billion of US dollars billion (see section 3).

Comment [c1]: Nadine, this number is missing!

79. Besides drug trafficking and smuggling, corruption is widespread in Afghanistan. In 2009, it is estimated that Afghan citizens had to pay approximately US$2,490 million in bribes, which is equivalent to 23% of country GDP. 27 This does not take into account proceeds generated by bribes paid by foreigners (e.g. to be awarded contracts). Finally fraud, and particularly financial fraud, needs to be mentioned. As indicated under section 1.3 below, the authorities consider that a single fraud in a commercial bank has generated almost US$1 billion in proceeds.

Statistical data on the numbers of investigations, prosecutions and convictions by type of predicate offenses

80. Reliable statistical information concerning the number of prosecutions and convictions for serious offences in Afghanistan is scant. Some information has been provided in a public document published by the Criminal Justice Task Force (CJTF)28 in its first annual report covering the period from March 2008 to March 2009. In the reported year, the Primary Court convicted 259 people on drug trafficking offences, and acquitted 134 people. The main concentrations of convictions were in Herat province (22%), Helmand province (17%), Kabul (15%), Nangrahar (13%). The Appeal Court convicted 355 people, and acquitted 66. In none of the reported cases was Article 42 of the Counter Narcotics Law of Afghanistan used to confiscate the proceeds of drug trafficking from those convicted. The authorities also indicated more broadly that, from 2005 to 2010, they investigation some 2,406 cases, which resulted in 262 persons being prosecuted under the Counter Narcotics Law. The number of persons which were ultimately sentenced under the Law from 2005 to 2010 was not clear, but the authorities mentioned that as a result of the convictions pronounced, some 100 vehicles owned or used by drug traffickers were confiscated.

81. Tables 2 and 3 below contain the crime statistics from 2007 to 2010 and the court cases with convictions in Kabul Province in 2009, respectively. No crimes statistics were available for the other provinces in Afghanistan.

Table 2:

Crime statistics 2007-2010

(Kabul Province only).29

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Table 3.

Court cases with convictions in Kabul Province in 2009.32

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Description of the money laundering situation

82. The authorities believe that the major proceeds-generating crimes for money laundering (and also the financing of terrorism) in Afghanistan are: production and trade in opiates and cannabis (including chemical precursors and infrastructure), corruption, protection payments for legal and illegal movement of goods, smuggling, and kidnapping. The authorities explained that money laundering is primarily cash-based. They did not mention corruption or fraud as major proceeds-generating crimes.

83. There is a coexistence of both rudimentary financial relations (large informal sector, cash-based, low rate of financial intermediation and of formal documentation of identity), and a financial sector well connected to the outside world (at least through correspondent accounts and SWIFT). In particular, due to high levels of donor assistance and military spending, formal financial flows to and from Afghanistan are very high in comparison with countries of similar GDP per capita, and a banking fraud of the extent of the one of Kabul Bank could be unlikely in countries with similar economic development. This situation is extremely challenging for the authorities as they have to address both risks emanating both for a rudimentary financial system and a more sophisticated one.

84. While the hawala system in Afghanistan is convenient and serves a legitimate remittance purpose, the serious weakness in the regulation and supervision of the licensed entities, make them vulnerable to those seeking to hide the illegal source or intended destination of funds. In addition, as indicated under section 1.3, a significant number of the hawaladars are not licensed and consequently are operating illegally and without any supervision. It is worth noting that in Afghanistan some hawaladars operate cross border correspondent relationships, which in the absence of a strong supervisory framework present opportunities for large scale money laundering through hawaladars. In relation to Pakistan, one hawaladar met by the assessors indicated that he transfers every year hundreds of millions of dollars which he justified as cash smuggling from Pakistan to Dubai. He explained this transit through Afghanistan by the strict exchange control restrictions in Pakistan which were reportedly easier to circumvent through the border between Pakistan and Afghanistan. He did not perceive this as a criminal activity, and indicated that the funds he is transferring are not related to drug trafficking. Four Afghan banks have correspondent accounts in Pakistan. There are also very developed financial relations with Iran; most of them are performed outside the legal framework.

85. Recently, the U.S. Department of the Treasury designated the New Ansari Money Exchange, as a major money laundering vehicle for Afghan narcotics trafficking organizations, along with 15 affiliated individuals and entities under the US Foreign Narcotics Kingpin Designation Act. The US authorities believe that the New Ansari Money Exchange is at the center of an unofficial network of individuals, money exchange houses and other businesses operating throughout Afghanistan and in the United Arab Emirates. Between 2007 and 2010, the New Ansari Money Exchange is believed by the US authorities to have concealed illicit narcotics proceeds among the billions of dollars it transferred in and out of Afghanistan. 36

86. There have been no successful prosecutions for money laundering. There are a small number of cases, twenty one, that have been analyzed by FinTRACA and that were disseminated to the AGO. The authorities have not pursued the proceeds of crime using freezing orders, confiscation orders, access orders or similar instruments in the past. This is slowly changing with the recent granting of access and freezing orders.

87. Due to the high level of informality and the weaknesses of the statistical apparatus, it is difficult to determine unusual financial trends which could suggest potential money laundering or the financing of terrorism. A few data is available to analyze trends and would benefit from further refinement and cross-comparison. When analyzing the amounts received through wire transfers in 2010, it is worth nothing that countries like the USA, Canada, and Turkey send more than they receive, while the UAE, Pakistan, China the UK and India receive more than they send. While trade, remittances and aid flows might explain some of these patterns, additional analysis could be necessary to explain economic rationale for some of the origin and destination countries.

uA01fig02

Top ten countries for wire transfers into Afghanistan, 2010

Citation: IMF Staff Country Reports 2011, 317; 10.5089/9781463923938.002.A001

Source: Fin TRACA. The total amount of wire transfers received from these 10 countries was more than US$1.21 in 2010.
uA01fig03

Top ten countries for wire transfers out of Afghanistan, 2010

Citation: IMF Staff Country Reports 2011, 317; 10.5089/9781463923938.002.A001

Source: FinTRACA The total amount of wire transfers sent to these 10 countries was more than US$1.15 in 2010.

88. Similarly, information is available on the main currencies reported in the cash and bearer negotiable instruments reports (CNBIRs). While the authorities indicate that 95% of the CNBIRs are submitted by MSPs transporting cash to Dubai, further analysis would be needed to explain the breakdown in currencies.

uA01fig04

CNBIR, reports by main currency, 2007-2010

Citation: IMF Staff Country Reports 2011, 317; 10.5089/9781463923938.002.A001

Source: FinTRACA

Information on terrorism and its financing

89. Terrorism and its financing remain a major cause of concern both in terms of security in Afghanistan and of funding for terrorists, terrorist organizations and terrorist activities in the country and around the world. Afghanistan faces serious terrorism problems threatening its stability, prosperity and good governance.37 Terrorist attacks target the local population,38 as well as the international community personnel present in the country.39

90. Numerous terrorist groups are believed to operate in Afghanistan. Among them is Al Qaeda, a global terrorist group founded by Osama bin Laden sometime between August 1988 and late 1989.40 It operates as a network with similarly motivated organizations in other countries and regions. On October 15, 1999 the Security Council adopted resolution 1267 (1999) imposing financial and other sanctions on the Taliban in Afghanistan for their support of Osama bin Laden. The sanctions have since been modified by subsequent resolutions. In December 2000, an arms embargo was added and those individuals and entities under sanction were expanded to include members of Al-Qaida and as of January 2002, a travel ban was added and the measures no longer exclusively target the territory of Afghanistan. The sanctions only apply to those individuals, groups, undertakings and entities associated with Al-Qaida and the Taliban as designated on a Consolidated List maintained by the Al-Qaida and Taliban Sanctions Committee.

91. A STR filed by one the Afghan banks indicated a positive match with the Consolidated list. As a result, FinTRACA ordered the freeze of the relevant bank account, but the freezing order was subsequently lifted by the President, for reasons that were not shared with the assessors, in violation of the country’s UN obligations. This reportedly enabled the designated person to regain control to his funds and leave the country.

92. Other terrorist groups operating in Afghanistan include Hizb-i-Islami (an insurgent group divided into two factions both led by former anti-soviet mujahedin commanders) and the Haqqani network (also headed by a former mujahedin, involved in the protection of cross border trade, including trade in opiates and hashish).

93. According to the authorities, terrorist financing continues to be a persistent problem in Afghanistan and there is much evidence of significant overlap between criminal proceeds related to the narcotics trade and corruption, and the financing of terrorism. The authorities believe the Taliban can raise around US$100 -200 million per year by “taxing” the opiate sector. It is likely that the Taliban and other anti government elements raise even more money through a wide range of other offenses. Financing of terrorism is most often done in cash, though the authorities explained that there have been alleged instances of bank accounts being used to move terrorist funding. Box 1 below shows a typology case relating to terrorist financing, reported in a 2008 FATF document. 41

Case study: Terrorist organization raises money through drug trafficking

Since 1990, Person A led an international heroin-trafficking organization (the “Organization”) responsible for manufacturing and distributing millions of dollars worth of heroin in Afghanistan and Pakistan. The Organization then arranged for the heroin to be transported from Afghanistan and Pakistan into the United States, including New York City, hidden inside suitcases, clothing and containers. Once the heroin arrived in the United States, other members of the Organization received the heroin and distributed the drugs. These co-conspirators then arranged for millions of dollars in heroin proceeds to be laundered back to Person A and other members of the Organization in Afghanistan and Pakistan. To launder the funds, Person A used several import/export commercial enterprises to wire his funds. Funds were placed in the financial system as proceeds and/or expenses related to those diverse concerns and remitted under that cover.

The Organization was closely aligned with the Taliban in Afghanistan. During the course of their cooperation, the Organization provided financial support to the Taliban. More specifically, between 1994 and 2000, the Organization collected heroin proceeds in the United States for the Taliban in Afghanistan. In exchange for financial support, the Taliban provided the Organization protection for its opium crops, heroin laboratories, drug transportation routes, and members and associates.

94. In the same report, the FATF stated the following: “Whether through the absence of effective jurisdictional control, tolerance of terrorist organizations and their activities, or active support to terrorist organizations, safe havens, failed states and state sponsors create enabling environments or otherwise provide support to terrorist organizations. Safe havens, failed states and state sponsors continue to represent crucial sources of support for terrorist organizations today, including from territories in Somalia, Iraq, and the Pakistan-Afghanistan border.”42

1.3. Overview of the financial sector

Evolution and specificities of the Afghan financial sector

95. The financial sector of Afghanistan has expanded significantly between 2005 and 2010, albeit in an environment characterized by very low level of human capacity, high levels of insecurity and a very new and untested legal and regulatory framework.

96. Despite some progress, bank intermediation and access to credit are still very low. Under 5% of the population are banked (according to a World Bank survey, only 30% of surveyed businesses had bank accounts). The rural nature of the population, lack of security and central government control also explain an almost complete lack of bank intermediation outside of the country’s four largest urban areas. Micro finance attempts to fill this gap but the share of total credit to GDP is 6.7% in Afghanistan, as opposed to the 43% average for South Asia. The bulk of activities in the banking sector remain in foreign currencies. In 2007, about 77% of total deposits and loans were denominated in US dollars. All interbank deposits were in foreign currencies (of which 80% were in US dollars). Some banks market Islamic banking products, however there is currently no legal framework specific to Islamic finance in the country and these products are offered under the Banking Law (BL).

97. Part of the rapid expansion in the banking sector assets was related to the introduction of “lottery accounts”, which have accounted for a significant share of the deposits of the two main banks between 2006 and 2010.43 For every US$100 deposited in a lottery account, the depositor is given a ticket in a luck draw held every month for a cash prize. At the beginning of 2010, the main bank was giving away a US$1million yearly prize and smaller amounts in monthly prizes.

98. While deposits were boosted by the lottery accounts scheme, loans increased quickly and a major fraud was allegedly developing in the main bank, Kabul Bank. The disclosure of information on the alleged loan fraud amounting to hundreds of millions of dollars led to a run on Kabul Bank in September 2010. These loans have been said to have enabled bank insiders to make investment abroad, including in properties in Dubai. In February 2011, the Afghan government communicated that “the main cause of Kabul Bank’s crisis is the unethical and fraudulent behavior of the bank’s executives and the inadequate supervision by the central bank.”44 In April 2011, the Governor of the Central Bank confirmed to the House of Representatives (Wolesi Jirga) the existence of forged loans at Kabul Bank and revealed names of perpetrators. These included the founder and chairman of the bank, the chief executive officer, a brother of the Afghan President, a brother and a nephew of the first vice-President. In May 2011, the chairman of the High office on oversight and anti-corruption indicated that 207 persons, including some shareholders, Parliamentarians and ministers had to repay about US$912 million to the bank, or almost 8% of the Afghan GDP, or 50% of the government revenues.

99. As the rule of law is not upheld on the entirety of the territory, there is still a large illegal financial sector, which plays a role in both internal and external trade finance. In particular, a large number of hawaladars operating outside Kabul and some other provinces are not licensed while they offer a diverse range of services such as money exchange, transfer of funds domestically and internationally, trade finance, microfinance and deposit taking.

100. As indicated in the table below, all the financial activities listed by the FATF are or can be performed under the Afghan legal framework, except for the participation in securities issues and the provision of financial services related to such issues.

Table 4.

Financial Activity by Type of Financial Institution

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Banking

101. The banking sector is comprised of 17 commercial banks, 12 of which are Afghan including two State owned banks (Bank e millie Afghan and Pashtany Bank), and two commercial banks specialized in microfinance. Banking is highly concentrated, as the two largest private commercial banks (Kabul Bank and Azizi Bank) held 40% of the total assets, 37% of the deposits and 66% of the loans at the time of the on-site visit.

Table 5.

Statistical table - Banking sector

Commercial Banks (17) as of February 2011

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Source: DAB, in US$ million. Data originally provided by the authorities in Afghanis and has been converted in US$. As of February 28, 2011: 1 Af = US$0.0232423002.

Microfinance

102. The Government has supported the expansion of microfinance through the Microfinance Investment Support Facility for Afghanistan (MISFA) which began in 2003. MISFA is a private non-share holding company owned by the Ministry of Finance. MISFA provides funding and capacity support to microfinance institutions (MFIs), which in turn channel development assistance and Government funds to increase the credit base at the lower tiers of the financial sector.

103. According to the World Bank there were 15 MFI’s active in 24 out of 34 provinces in September 2008. The average loan disbursements were US$2.7 million per month (cumulative US$518.69 million since 2003). There were 447,633 active clients and the average loan size was US$311, but loans are provided up to US$5,000. Three MFIs are operationally self sustainable and the remainder are 84.4% self sustainable.

Money Service Providers

104. The number of licensed MSPs (or hawaladars) has steadily increased over the years. The number of MSPs varies from province to province. Only a limited number of MSPs have been licensed in regions such as Helmand and Kandahar where this type of financial institution is very active but the security situation in these areas has not allowed DAB to roll-out the licensing requirement. As of end January 2011, FSD’s licensing department has issued 320 licenses to MSPs. Most of the licensed MSPs are located in the Kabul province, with a majority operating in the Shahzada market in Kabul. One MSP, which has 460 agents location at this point, submitted an application to be an Electronic Money Institution (EMI). These agents include both licensed financial institutions as well as small retail stores.

Foreign Exchange Dealers

105. As of January 2011, 679 licenses have been issued by DAB to foreign exchange dealers. While present in the whole country, no foreign exchange dealers have been licensed in Kandahar and Helmand.

Insurance

106. In 2007 the Afghanistan Insurance Commission (AIC) was established in the Ministry of Finance. The first private insurance company, the Insurance Corporation of Afghanistan, was licensed by the AIC in 2008 and does not offer life insurance and other investment related insurance products. Two insurance brokers operate in the country. The insurance supervisor did not provide information on the type of products that are sold by brokers, but was doubtful that it includes life insurance and other investment related products.

Leasing

107. Leasing services are underdeveloped in Afghanistan. Only one company offers leasing of agricultural products and indicates to operate in compliance with the Sharia principles. The Secured Transaction Law, which was in parliament at the time of the onsite visit, should provide a legal basis for the expansion of leasing services. In the absence of this law the sector is unregulated.

1.4. Overview of the DNFPBs

108. While the Designated Non-Financial Businesses and Professions (DNFBPs) sector is generally not organized in Afghanistan, some businesses and professions may have a relatively important role in the prevention of money laundering and the financing of terrorism in an economy which is mostly cash based and where the financial sector only captures a small share of the economic transactions. These professions are, in particular, lawyers, accountants, real estate agents and dealers in precious metals and stones.

109. Casinos. Gambling is outlawed in Afghanistan pursuant to Article 5, paragraph 1 of the Private Investment Law and Chapter 20 Article 353 of the Penal Code. While anecdotic evidence indicates the existence of forms of popular gambling in the country such as kite fighting or quail fighting, there is no evidence of the existence of illegal casinos. At the time of the onsite visit, some banks where still operating “lottery accounts” (see above under section 1.3) which were not considered as gambling by the authorities. Finally, there is no indication of internet casinos operating from Afghanistan, however the prohibition of gambling in the penal code is related to gambling taking place in “public places, places or houses prepared for this purpose”, and would not apply to this activity.

110. Real estate agents. While the profession of real estate agents exists in Afghanistan, it is not organized. The authorities did not provide any estimation of the number of real estate agents in the country. It is worth noting that in part due to the presence of a large number of foreigners as well as of proceeds of crimes, the demand for luxury properties in Kabul is high and has led to a real estate boom. Anecdotic evidence indicates monthly rentals over US$20, 000 for some buildings, and that residential property in Kabul’s prime neighborhood is valued at an average of US$1,500 per square meter. The Ministry of Justice is considering introducing a department that will be responsible for registering and overseeing real estate agents.

111. Dealers in precious metals and dealers in precious stones.46 Afghanistan has a long history of mining and trading in precious metals and stones. In fact, some of the earliest records of mining anywhere in the world are from Afghanistan, dating back over 6,000 years. Emeralds, ruby and sapphires mining is typically an artisanal activity, carried out by people living in villages surrounding the mines. According to the Ministry of Mines, most of the gemstones mined in Afghanistan leave the country illicitly, 90-95% of them going to Peshawar in Pakistan where they are sorted for quality. Due to this pattern of trade, Afghanistan gains little value from its gemstones, and makes the value of the annual production difficult to estimate. While the World Bank has valued it at US$2.75 million in 2004,47 the UNDP has suggested a potential annual value at US$160 millions.48 Emeralds is the main resource and its production, in the Panjshir Valley, was estimated between US$8-10 millions before the war and was a major source of financing for the northern alliance of Ahmad Shah Massoud. Concerning precious metals, there is also a serious potential for gold in Afghanistan. Mining and trading in precious metals and stones is primarily regulated by the Minerals Law of 2005 which subjects trading in minerals to authorization by the Ministry of mines. Jewelers are subject to the same requirements of registration and municipal license than other businesses. In Kabul, there is an association of dealers in precious metals and stones. Early 2011, the Ministry for Mines announced that the country has untapped minerals worth over US$3 trillion.

112. Lawyers. The legal profession is organized pursuant to the Advocate’s law enacted by the Parliament in November 2007. The law provides for an independent bar association to be established to regulate all activities of the advocates. The first general assembly of the Afghan Independent Bar Association (AIBA) was held in July 2008 and the by-laws were debated and adopted. The AIBA officially opened in September 2008 and began issuing licenses for attorneys in October 2008. As of May 2010, 769 advocates from across the country have become members of the AIBA. A code of conduct has been approved in July 2009. All the relevant documents as well as the list of the registrated advocates are available on the AIBA’s website (http://www.aiba.af).

113. Notaries. Based on information provided by the bar association, the independent legal profession of notary does not exist in Afghanistan.

114. Accountants. The accountant profession has developed in Afghanistan in recent years, in large respect due to the importance of the aid sector in the economy. However, as indicated in the 2009 ROSC on Accounting and Auditing,49 there is no local accounting or auditing standards, professional regulator, corporate regulator or oversight organization. In 2008, there were 16 audit firms registered with the Afghanistan Investment Support Agency (AISA) though it is likely that more than half are inactive, and there were fewer than 20 qualified accountants in the city of Kabul. Statutory audits are not legislated, even in the recent corporate legislation, other than in insurance and banking law, and thus there is limited demand for audit services. The local branches of large international accounting firm networks dominate the limited audit market in Afghanistan, including almost all the banks operating in the country. The Afghan association of professional accountants has been created in 200750 and counted approximately 50 members in 2009.

115. Trust and company service providers. While the Afghan legislation does not provide for the creation of trusts or other similar legal arrangements, it is highly probable that the simplest forms of company service providers exist in the country (i.e. providing a registered office; business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement). However, the authorities did not provide any information on this profession.

1.5. Overview of commercial laws and mechanisms governing legal persons and arrangements

116. Legal persons in Afghanistan include corporations, limited liability companies, or partnerships. These are established under the 2007 Commercial Laws. There are no trusts or other legal arrangements.

117. The Afghan Central Business Registry (ACBR), which operates under the Ministry of Commerce and Industry (MoCI), must register all companies in Afghanistan. ACBR offices are located in the capital and 3 provinces across Afghanistan and they provide services, guidance and ensure that companies and their directors comply with the statutory requirements.

118. The following documents are required by the ACBR at the time of registration: (i) an official letter from the relevant licensing office that will later be responsible for issuing a license to the new business; (ii) copy of Tazkera51 or Passport of the president and vice president of the business; (iii) two sets of color passport photographs of the president and vice president of the business; (iv) Article of agreement that is drafted by a corporation or partnership. It must list the names of owners, shares, and other agreement clauses. This document is submitted only once to ACBR. If there is a change in this document the business must report the changes to ACBR and submit the most recent document; and (v) a copy of the business license once issued by the relevant license department. Only the president and vice president are identified at the stage of registration. The beneficial owners are not identified.

119. A Legislative Decree (LD) on Private Investment was issued by the President in 2005. This LD established AISA. Although all companies need to be registered with ACBR, AISA’s mission is to facilitate to investors all necessary permits, licenses and clearances. Limited information on the name, sector, license number, expiration date and address of the companies is publicly available via AISA online directory.52

120. It is worth noting that, according to an AISA bulletin:53 “[…] most of the investment in Afghanistan flows through informal non banking channels and, therefore, does not capture the overall picture of investment. It may also be noted that consequent to simplification of licensing procedures, AISA does not seek any proof of the amount of capital declared by the investor at the time of filing registration. Likewise, some investor may be under registering their initial capital just to avoid the delay in procuring license as company with more than US$3 million investment has to get the prior approval of the High Commission on Investment before getting a license.” Accordingly, the information about legal persons is likely to be, in most cases, inaccurate and do not necessarily reflect the real size of the company, the beneficial owners and those who control it.

121. The work of the non-profit sector in Afghanistan is governed by the Non-Governmental Organizations Presidential Decree of 2005, the Counter Financing of Terrorism Legislative Decree (Articles 25-28), and the Law on Social Organizations (LSO) of 2003. The NGO Presidential Decree of 2005 repealed the Regulation on the Activities of Domestic and Foreign Non-Governmental Organizations, issued in 2000 by the Taliban regime. Other laws and regulations may apply to the supervision of NPOs, including charities, but the assessment team was not able to obtain conclusive information on this point.

1.6. Overview of strategy to prevent money laundering and terrorism financing

AML/CFT Strategies and Priorities

122. According to DAB and FinTRACA, the AML/CFT strategy is essentially centered on having an effective infrastructure within the financial sectors which is properly supervised by the regulatory authority (the DAB) and imposing sanctions and penalties as appropriate for non compliance with and breaches to AML/CFT preventive measures.

123. However, there is no national strategy or document indicating the aspects of the AML/CFT policies which have to be prioritized. In addition, the significant involvement of foreign donors in AML/CFT related technical assistance, while overall valuable, has not been based on an overall assessment of the priorities. In particular, in the law enforcement and intelligence area, assistance most often responded to the needs of the donor countries and their agencies in terms of international cooperation with Afghanistan. In the absence of national strategy, the competition between foreign agencies has sometimes translated into competition between domestic agencies, rather than providing a consistent assistance to address the major weaknesses in the Afghan AML/CFT regime. Up to now, the authorities did not engage in measuring the effectiveness of the AML/CFT policies.

The Institutional Framework for Combating Money Laundering and Terrorist Financing

124. The main institutions responsible for combating of money laundering and terrorist financing are the DAB, the Financial Intelligence Unit (FINTRACA), the Ministry of Interior, the Ministry of Justice, the Attorney General’s Office and the Courts. In addition, the High Office for Oversight plays a role in coordinating and implemented the country’s anti-corruption strategy.

125. Within DAB, the Financial Supervision Department’s AML/CFT section takes primary responsibility for implementation of the AML and CFT LDs, by banks and MSPs.

126. FinTRACA became operational in 2006. It is responsible for promoting and assessing the quality of compliance within the financial sector. This is done primarily through centralizing and analyzing data on suspicious transactions reports and large cash transactions reports, developing forms and procedures, and training institutions responsible for implementing the AML/CFT regime on various aspects of the reporting framework.

127. Within the Ministry of Interior, the Afghanistan National Police including the Criminal Investigation Division, the Border Police, and the Counter Terrorism Police, investigate predicate crimes, money laundering and terrorist finance. In addition, the Major Crimes Task Force investigates abductions and corruption, and the Sensitive Investigations Unit investigates narcotics associated crimes. The National Directorate of Security is involved in gathering intelligence on all matters related to national security.

128. The Ministry of Finance is involved in all matters related to revenue collection, including taxes and customs. They are involved in customs regulation and administration at all international borders.

Approach Concerning Risk

129. The authorities are not currently taking a risk based approach to AML/CFT. In spite of the vast illicit sector and corruption issues that plague Afghanistan and the risks associated with them, the authorities were relatively unresponsive on the subject of how this may impact the implementation of the AML/CFT regime. Significantly, there was little understanding of the importance of the effective implementation of the AML/CFT regime to overall governance and the rule of law, and conversely, the criticality of the rule of law to economic development and financial integrity.

130. Implementation of the existing AML/CFT regime seemed largely compliance based. While this is not negative in itself, the authorities should rapidly consider implementing a risk-based approach based on those risks and vulnerabilities specific to Afghanistan. This would include, but not be limited to, an acknowledgement of the risks for ML and TF posed by exposure to a large illicit sector and the vulnerabilities created by a highly corrupt environment and weak criminal justice system.

Progress since the Last IMF/WB Assessment or Mutual Evaluation

131. This is Afghanistan’s first ever AML/CFT assessment.

2. LEGAL SYSTEM AND RELATED INSTITUTIONAL MEASURES

Laws and Regulations

2.1. Criminalization of Money Laundering (R.1 and 2)

2.1.1. Description and Analysis54

Legal Framework

132. Afghanistan’s AML/CFT framework is based on the “Anti-Money Laundering and Proceeds of Crime Law” (Law No 8 40) which was issued by the President as a legislative decree in 2004 (hereafter referred to as the AML LD). As mentioned in Section 1 of this report, the AML LD is enforceable, but has been with Parliament for the last five years and is still pending final endorsement.

133. The AML LD criminalizes money laundering, establishes the provisional measures that may be taken, allows for confiscation, and sets a basic framework for international cooperation in the fight against both money laundering and terrorist financing. Other relevant texts include the 1976 Penal Code (PC), the “Law on combating the financing of terrorism” (which, despite its title, is a LD, and, like the AML LD, has not been submitted to Parliament and therefore suffers from the same ambiguities as the AML LD), the Counter-narcotics law and the Police law.

134. Pursuant to Article 134 of the Constitution, the “discovery of crimes” is the duty of the police, and the “investigation and filing the case against the accused in court” is the responsibility of the AGO. The functions of the police and AGO are set out, respectively, in the Police law and the Law on the structure and authority of the Attorney General’s Office. As per Article 116 of the Constitution, the judiciary comprises the Primary Courts, Courts of Appeal and the Supreme Court, and their functions as outlined in the Interim Criminal Code (CC) for Courts.

135. Criminal procedure in general lacks clarity. Procedural elements are spread out in various texts, not all of which were provided to the assessment team. According to some of the authorities, criminal procedure is governed by the Interim Criminal Law for Courts of 2004 and the Detection and Discovery Law of 1981 (which was not submitted to the assessment team). According to the judges, however, it is governed by the Criminal Procedure law (which pre-dates both the current and the Taliban regimes, and, according to representatives from the Supreme Court, has since been amended but those amendments were not provided to the team); the Interim Criminal Code for Courts and the Law on the Structure and Authority of the Attorney General’s Office.

136. There are three types of crimes under Afghan criminal law: (i) the felony, which carries a sentence of death or “continued imprisonment or long imprisonment (Article 24 of the Penal Code, PC); (ii) misdemeanor, which carries a sentence of imprisonment of more than three months and up to five years, or a cash fine or more than Af 3,000 (Article 25 of the PC); and (iii) obscenity, which carries a sentence of imprisonment of 24 hours to three months, or a cash fine of up to Af 3,000 (Article 26 of the PC).

137. The principal types of punishment under the PC are: Execution (by hanging – Article 98); Continued imprisonment (from sixteen to twenty years – Article 99 PC); Long imprisonment (no less than five years and not more than fifteen years – Article 100 PC); Medium imprisonment (from one to five years – Article 101 PC); Short imprisonment (from twenty-four hours to one year – Article 102 PC); Fines (not less than Af 50 with maximum stipulated in the law). The PC also provides for consequential punishments (such as the deprivation of certain rights and privileges as a consequence of imprisonment – Article 112 – 116) and “complementary punishments” (such as confiscation -Article117-120).

138. Money laundering is punishable by imprisonment for two to five years and/or a fine that may range between Af 50,000 and Af 250,000 (approx. US$1,000 and 5,040 respectively – Article 49 of the AML LD). It therefore constitutes as a misdemeanor under Afghan law.

139. To date, money laundering has rarely been investigated and prosecuted, and has not been sanctioned by the courts. There is therefore very little experience in the implementation of the money laundering offense and no case law that would establish the courts’ understanding of the AML LD.

Criminalization of Money Laundering (c. 1.1—Physical and Material Elements of the Offense):

140. Afghanistan criminalized money laundering in Article 3 of the AML LD as follows: “A person commits the offense of money laundering if the person:

  • a) conceals, disguises, converts, transfers, removes from or brings into Afghanistan funds and property, knowing or having reason to believe that it is derived directly or indirectly from acts or omissions [which constitute an offense in Afghanistan];

  • b) acquires, possesses or uses funds and property knowing or having reason to believe that it is derived directly or indirectly from those acts or omissions; or

  • c) enters into or participates in an arrangement or transaction knowing or having reason to believe that it facilitates (by whatever means) the acquisition, retention, use or control of funds and property derived directly or indirectly from those acts or omissions by or on behalf of another person.”

141. Article 3 also provides that “concealing or disguising funds and property includes concealing its nature, source, location, disposition, movement or ownership or any rights with respect to it.”

142. The money laundering offense is drafted in terms that are very similar to those of the Vienna and Palermo Conventions (to which Afghanistan is a party). It covers the conversion and transfer of proceeds of crime as set forth in Articles 3(1) (b) of the Vienna Convention and 6(1) of the Palermo Convention, as well as the concealment or disguise of the elements listed in these same articles.

143. Unlike the Conventions however the law does not address the purpose of the conversion and transfer of the proceeds or crime. Under the Conventions, the conversion or transfer should be an offense where the defendant knows that the property involved is the proceeds of crime and does so for the following two purposes: (i) concealing or disguising its illicit origin; or (ii) helping an person involved in the commission of the predicate offense to evade the legal consequences of his or her action (Vienna Convention Article 3(1) (b) (i), and Palermo Convention Article 6(1) (a) (i). The fact that the AML LD is silent in this respect would suggest that, as long as the perpetrator knows or has grounds to believe that the funds or property are the proceeds of crime, both the conversion and transfer of these proceeds are criminalized in all cases, i.e. regardless of their perpetrator’s ultimate intention. The AML LD therefore goes beyond the standard on this point by not requiring proof of the purposive element.

The Laundered Property (c. 1.2):

144. The money laundering offense extends to “funds and property” that directly or indirectly stem from an offense (Article 2 lit. m and Article 3 of the AML LD). “Funds and property” cover all the elements required by the standard namely “assets of every kind, whether corporeal or incorporeal, movable or immovable, tangible or intangible, and legal documents or instruments, including electronic or digital, evidencing title to, or interest in, such assets” (Article 2 lit. g AML LD). Discussions with the authorities suggested however that, in the rare instances where they investigate money laundering, they do not use the definition of funds and property to its full extent in the sense that they pursue only funds (either in cash or deposited on bank accounts) and none of the other types of assets.

Proving Property is the Proceeds of Crime (c. 1.2.1):

145. No mention is made in the AML LD regarding the need (or lack thereof) to secure a prior conviction for the predicate offense to prove that the property is tainted. The fact that there is no explicit restriction on this point would suggest that money laundering charges can be pressed successfully even in the absence of a prior conviction for the predicate. This view was shared by the representatives from the Ministry of Justice, but discussions held with other authorities on the analysis of evidence more generally suggest that prosecutors and judges would not be satisfied that the property is proceeds of crime unless there is a conviction for the predicate crime. Consequently, there is a risk that, even though prior conviction is not a specific requirement under the decree, it may become one in practice. As noted above, there is no case law on this point.

The Scope of the Predicate Offenses (c. 1.3):

146. Afghanistan opted for an all-crimes approach to its money laundering offense. Although the money laundering offense does not specifically refer to “predicate offenses” as such (only to offenses), Article 2 lit. l of the AML LD nevertheless defines “predicate offense” as any criminal offense, even if committed abroad, enabling the perpetrator to obtain proceeds. This means that all asset generating offenses under Afghan law, whether felonies, misdemeanors or obscenities, are predicate offenses to the money laundering offense. However, only nine of the 20 FATF-designated categories of offenses have been criminalized in Afghanistan; despite the “all-crimes approach taken under the AML LD, all the other categories of offenses fall outside the scope of the money laundering offense.”

147. The table below indicates the activities that constitute predicate offenses to money laundering and those that do not:55

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Threshold Approach for Predicate Offenses (c. 1.4): Not applicable.

Extraterritorially Committed Predicate Offenses (c. 1.5):

148. The AML LD specifically provides that predicate offenses for money laundering extend to conducts that occurred in another country which constitute an offense in that country, and which would have constituted an offense in Afghanistan had they occurred domestically (Article 3 para. 1 (b).

Laundering One’s Own Illicit Funds (c. 1.6):

149. The AML LD makes no distinction between self-laundering and third party laundering. According to the authorities, no fundamental principle of Afghan law would prohibit them from pressing money laundering charges against the perpetrator of the predicate offense. Self-laundering is therefore punishable to the same extent as third party laundering. Although they have not used this provision in practice, the authorities seemed comfortable with the concept of prosecuting the perpetrator of the predicate offense for money laundering as well.

Ancillary Offenses (c. 1.7):

150. The attempt to commit the money laundering offense, as well as “aiding, abetting, facilitating or counseling the commission of [money laundering]” are punishable “as if the [money laundering offense] had been committed” (Article 46 para. 2 of the AML LD). However, the association with the criminals or conspiracy to commit the money laundering offense is not criminalized.

Additional Element—If an act overseas which does not constitute an offense overseas, but would be a predicate offense if it occurred domestically, leads to an offense of ML (c. 1.8):

151. Article 3 addresses conducts that occurred in another country only to the extent that they constitute offenses in that country. Consequently, the AML LD would not apply to the proceeds derived from a conduct that occurred in another country which did not criminalize that conduct, even if it constituted a predicate offense in Afghanistan.

Liability of Natural Persons (c. 2.1):

152. The money laundering offense applies to those who intentionally engage in one of the money laundering activities listed above knowing that the property is the proceed of crime. The AML LD goes beyond the standard by also punishing those who engage in these activities while “having reason to believe” that the property is derived from a crime (Article 3 of the AML LD).

The Mental Element of the ML Offense (c. 2.2):

153. Article 3 para. 3 of the AML LD specifically provide that knowledge or belief may be inferred from objective factual circumstances. While the law meets the standard on this point, discussions with the authorities raised doubts as to whether judges would indeed consider objective factual circumstances alone (i.e. in the absence of a clear confession or witness statements) to be sufficient to prove the money laundering offense.

Liability of Legal Persons (c. 2.3):

154. Corporate criminal liability is explicitly provided for in the AML LD for entities other than those owned by the Afghan Government, and may apply with no prejudice to the individuals who committed the offense or were accessories to the offense (Article 47 of the AML LD). Corporate criminal responsibility also features in the PC (Article 96) and is therefore available for the predicate offenses that it criminalizes. No information was provided on the practical conditions of criminal liability or on the authorities’ practice in that matter (including in criminal proceedings other than those initiated under the AML LD).

155. Similarly, no information was provided on the exemption of liability for state owned entities. It is therefore unclear if, for example, the exemption extends to all State-owned entities, including those that are jointly owned by the State and private shareholders.

Liability of Legal Persons should not preclude possible parallel criminal, civil or administrative proceedings and c. 2.4):

156. No information was provided as to whether other sanctions are available and, if available, whether criminal liability of legal persons would preclude or not parallel proceedings.

Sanctions for ML (c. 2.5):

157. Money laundering is subject to “medium imprisonment.” When committed by natural persons, it is sanctioned by imprisonment from two to five years, or a fine of not less than Af 50,000 (equivalent to approx. US$1,000) or more than Af 250,000 (equivalent to approx. US$5,040), or both (Article 46 of the AML LD).

158. Corporate entities (other than those owned by the Afghan government) are liable to a fine of not less than Af 250,000 and not more than Af 1,250,000 (i.e. approx. US$25,215). They may additionally be:

  • a) banned for a period not to exceed five years from directly or indirectly carrying on certain business activities;

  • b) dissolved if such corporation had been established for the purpose of committing the offence in question or it allowed its premises to be used for such purposes; and

  • c) required to publicize the judgment in the press or in any other audiovisual media (Article 47 of the AML LD).

159. These sanctions are significantly higher than the sanctions for fraud or smuggling (short imprisonment of up to three months and a fine in both cases) and lower than the sanction for bribery (imprisonment between two to ten years). Considering the size of the drug trade (and ensuing money laundering), these sanctions appear rather low, in particular as far as monetary sanctions are concerned. Moreover, the term of imprisonment is lower than in several countries in the region.56 In the absence of convictions, sanctions have not been imposed on the basis of the AML LD.

Statistics (R.32)

160. Overall, reliable statistics are scarce in Afghanistan.

161. Money laundering may be investigated by several law enforcement agencies (see write-up under Recommendations 27 and 28):

  • The Major Crime Task Force (MCTF), which was established in 2010 to investigate corruption, organized crime and kidnappings (and related money laundering), indicated that it had investigated some 100 cases from its inception to January 2011. Money laundering was investigated in 17 of these cases;

  • The Counter-Narcotics Police of Afghanistan (CNPA) investigated money laundering in 23 cases (all of which were also related to terrorism financing);

  • No information was provided on the number of cases investigated by the ANP.

162. The AGO indicated that it usually investigates 5 or 6 cases of money laundering a year (in the Kabul district only) but has only investigated 2 cases during the course of 2010. (By comparison, the AGO’s Anti-corruption unit in Kabul has prosecuted some 1000 cases. Statistics on other crimes are provided in Section 1 of this report).

163. None of the money laundering matters has been brought before the courts.

Analysis of effectiveness

164. The fact that the AML LD is still pending final Parliamentary approval five years after having been transmitted to the National Assembly raises serious concerns about Afghanistan’s commitment to AML/CFT. This means that the entire AML framework could be deprived of a legal basis if Parliament were to reject the decree.

165. The Afghan money laundering offense covers most of the elements set forth in the Vienna and Palermo Conventions, and, despite the deficiencies that it still suffers from (in particular with respect to the list of predicate offenses), should have been sufficient to enable the authorities to prosecute and sanction money laundering to a larger extent. In practice, however, the implementation of Article 3 of the AML LD is particularly weak: few investigations have been undertaken into money laundering activities, and there has not been a single prosecution or conviction in application of the AML LD.

166. From 2004 (entry in force of the AML LD) until March 2006 (establishment of FinTRACA), no investigation was conducted on the basis of the AML LD. Since March 2006, the situation has improved somewhat, notably as a result of the assistance and support provided to key stakeholders (including law enforcement agencies) by the international community. The implementation of the decree nevertheless remains ineffective and the authorities recognize that many obstacles remain. They indicated that, although the number of STRs has increased steadily, particularly since September 2008, FinTRACA is constrained from disseminating the analyzed intelligence for two main reasons: firstly, until the beginning of 2009, FinTRACA was unable to identify suitable units within the law enforcement agencies with the necessary skills to carry out effective investigations into money laundering crimes. Secondly, in light of the “corruption that pervades Afghanistan”, as noted by the authorities, FinTRACA harbored serious concerns with respect to the protection of the sensitive information to be disseminated.

167. Overall, the criminal process seems both cumbersome and slow, particularly at the level of the AGO. Some law enforcement agencies expressed concerns about the staged-approach taken by prosecutors, suggesting even that some of the stages of the process may be redundant.

168. More generally, there is considerable lack of clarity both on the amount of evidence required to initiate a prosecution and obtain a conviction, and on the means by which evidence may be gathered. There also appears to be great divergence in the authorities’ views on the subject. Wire tapping is a case in point: on the one hand, it is explicitly recognized in the AML LD as one of the measures that may be ordered by the courts for the purpose of obtaining evidence on the money laundering offense or its predicates (without restriction as to the type of predicate involved) (Article 44). On the other hand, it is considered by the Supreme Court representatives met during the assessment mission as constituting “strong evidence” in a trial for terrorism, terrorist financing or drug-related offense, and as “weak evidence” in cases of alleged corruption; finally, mention was made of a case of alleged corruption of a high level official arrested on the basis of recorded telephone conversations where the charges were dropped and the suspect set free on the grounds that Afghan law “prohibits” wiretap evidence in corruption cases (while nothing in the law seems to confirm such prohibition). This lack of clarity notably leads the prosecutors to require additional evidence from the law enforcement agencies during the investigation stage, and judges to send cases back to the AGO to complete the evidence or to address “mistakes.” It also causes considerable delays in the overall criminal process.

169. Another difficulty that the authorities acknowledged they are facing (and which they all concede) is the lack of knowledge and experience of the investigating agencies, public prosecutors’ office and the judiciary in handling money laundering cases.

170. This lack of familiarity with the money laundering offense notably means that, in most cases, the authorities focus solely on the predicate and very rarely make use of the tools provided by the AML LD. This raises serious concerns because there is every indication that money laundering in Afghanistan occurs on a particularly large scale. As indicated in Section 1 of this report, crime is both frequent and lucrative in Afghanistan: assets generated by drug trafficking is estimated at US$4billion a year; corruption is estimated to generate US$2.5 billion a year. While no estimates exist for other asset generating offenses, the frequency with which crimes such as kidnapping and extortion occur would tend to indicate that, they too, generate large amounts of proceeds to be laundered.

171. The authorities recognized that pervasive corruption, at all stages of the criminal process, has a significant impact on the fight against crime: anecdotal evidence notably indicated that a number of investigations as well as prosecutions have been “paid off” and dropped. Corruption also causes mistrust between the competent authorities.

172. Sanctions for money laundering, in particular monetary sanctions, appear to be low, both in light of the drug trade and in comparison with other countries, and are unlikely to be dissuasive.

173. Finally, as mentioned in Section 1, the actions of anti-government elements in some part of Afghanistan entail that the authorities are not in a position to enforce the rule of law on the entirety of the country’s territory. This affects the implementation of the whole criminal framework, including the AML LD.

174. Overall, the high level of crime in Afghanistan and paucity of law enforcement measures taken, combined with weak AML/CFT preventive measures in and supervision of the financial sector, and the absence of an AML/CFT framework for designated non-financial businesses and professions contribute to the creation of a high risk of money laundering. The current number of investigations into, prosecutions of and convictions for money laundering is not in any way commensurate with that risk.

175. A clear analysis of money laundering trends and typologies in Afghanistan is not possible considering the scarcity of money laundering investigations, but according to the law enforcement agencies the most frequent ways to launder funds, in addition to the use of bank accounts, are the resort to cash couriers and trade-based money laundering.

2.1.2. Recommendations and Comments

176. In order to comply fully with Recommendation 1, the authorities are recommended to:

  • Amend the AML LD where necessary and obtain Parliamentary approval on an expedited basis;

  • Ensure that, as security improves, the AML legal framework is progressively implemented in the whole country;

  • Criminalize participation in an organized criminal group and racketeering; trafficking in human beings and migrant smuggling; environmental crime, kidnapping, illegal restraint and hostage-taking so that they may constitute predicate offenses to money laundering;

  • Ensure that prior conviction for the predicate is not considered as a condition to proving that property is the proceeds of crime;

  • Criminalize association with and conspiracy to commit or attempt to commit the money laundering offense;

  • Make use of the money laundering offense.

177. In order to comply fully with Recommendation 2, the authorities are recommended to:

  • Amend the AML LD where necessary and obtain Parliamentary approval on an expedited basis;

  • Establish dissuasive monetary sanctions;

  • Ensure that criminal sanctions do not preclude the possibility of parallel civil or administrative proceedings if such proceedings are available;

  • Extend criminal liability for money laundering to corporate entities that are partially owned by the Afghan government;

  • Although the law meets the standard in this respect, ensure that, in practice too, intention can effectively be inferred from objective factual circumstances.

2.1.3. Compliance with Recommendations 1 and 2

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2.2. Criminalization of Terrorist Financing (SR.II)

2.2.1. Description and Analysis

Legal Framework

178. Afghanistan signed and became party to the International Convention for the Suppression of the Financing of Terrorism (ICSFT) on September 24, 2003 but has not implemented in full.

179. Terrorist financing is criminalized in Article 3 of the “Law on Combating the Financing of Terrorism” (Law No 839, of October 20, 2004, hereafter the CFT LD). As is the case with the AML LD, the CFT “law” is in fact a legislative decree drafted at a time when there was no Parliament in place. It was signed by the President on October 20, 2004 Article 2004 and was submitted to Parliament as required by the Constitution, but has not yet approved by Parliament (see also write-up under Section 1).

180. Terrorism itself is not defined. Various forms of crimes against the internal security of the State are criminalized under Book II Chapter 2 of the PC including some but not all of the acts that must be offenses under the treaties listed in annex to the ICSFT. Regardless of the acts that are criminalized under the PC, with the exception of the issue noted below regarding conventions to which Afghanistan is not a party, financing activity for each of the acts set forth in the ICSFT is criminalized as required by ICSFT.

181. The provisions of the AML LD also apply to the fight against terrorist financing to the extent that the purpose of the decree, defined in Article 1, is “to prevent and prohibit the use of the financial institutions or any economic activities for money laundering and for the financing of terrorism.”

182. No charges have been brought in application of the CFT LD. The terrorist financing offense therefore remains untested by the courts.

183. As mentioned above, the actions of anti-government elements hinder the implementation of the rule of law in some areas of Afghanistan. This affects also Afghanistan’s fight against terrorist financing.

Criminalization of Financing of Terrorism (c.II.1):

184. The 2004 Constitution sets out the State’s mandate to “prevent all kinds of terrorist activities” (Article 7). The CFT LD criminalized terrorist financing in a way which follows the terms of the ICSFT. Article 3 provides that:

  • 1. Any person commits the offense of the financing of terrorism who by any means, directly or indirectly, unlawfully and willfully, provides or collects funds and property, or tries to provide or collect funds and property, or provides or tries to provide financial or other services with the intention that they should be used or in the knowledge that they are to be used, in full or in part, in order to carry out:

  • a) an act which constitutes an offense within the scope of and as defined in one of the treaties listed in the annex to the ICSFT, and to which Afghanistan is a party; or

  • b) any other act intended to cause death or serious bodily injury to a civilian, or to any other person not taking an active part in the hostilities in a situation of armed conflict, when the purpose of such act, by its nature or context, is to intimidate the population, or to compel a government or an international organization to do or abstain from doing any act.

185. The CFT LD further mentions that no consideration of a political, philosophical, ideological, racial, ethnic, religious, or other similar nature may be taken into account in order to justify the commission of any of the terrorist financing offenses and ancillary offenses thereto (Article 3 para. 3. lit. d).

186. “Funds and property” are defined as “assets of any kind, whether material or immaterial, corporeal or incorporeal, movable or immovable, tangible or intangible, and legal documents or instruments, including electronic or digital, evidencing title to, or interest in, such assets” (Article 2 para. 1 CFT LD). This definition is in line with the ICSFT notion of funds. Unlike the Convention, the CFT LD does not specifically address the manner in which these funds were acquired, the decree does not address the source of the funds, and it was not established that the terrorist financing offense extends to funds of both legitimate and illegitimate sources.

187. As mentioned under the write up for Recommendation 1 above, the practice in Afghanistan, regardless of the type of crime investigated and prosecuted, is to go after funds (in cash form or in bank accounts), and not other type of assets. The tools provided in the CFT LD are therefore not used to the full.

188. The collection of funds for and their provision to terrorist organizations and terrorist individuals is not separately criminalized. Thus their provision to terrorists or terrorist organizations is covered only if shown to be for terrorist acts. Furthermore, the acts for which funding is provided or collected are limited to the offenses defined in the anti-terrorism treaties to which Afghanistan is a party, which falls short of the standard: Special Recommendation II goes beyond the ICSFT on this point by requiring the criminalization of the funding of the terrorist offenses set forth in all treaties listed in annex to the ICSFT, regardless of whether a specific country is party to them.

189. Article 3 para. 2 CFT LD explicitly provides that it is not necessary that the funds and property be used to carry out an offense for the terrorist financing offense to be complete. The funds and property must, however, nevertheless be linked to a specific terrorist act.

190. The attempt to commit the terrorist financing offense is criminalized in the same way as the TF itself. Participation in the terrorist financing offense, as well as the organization, direction or motivation of others to commit the TF offense and the contribution to the commission of that offense by a group of persons acting with a common purpose are also criminalized under the CFT LD (Article 2 para. 3, lit. a to c). However, no mention is made of the organization, direction, motivation of individual terrorist or of the contribution to the commission of the terrorist financing offense by an individual.

191. The authorities did not provide the list of the treaties listed in the annex to the ICSFT, to which Afghanistan is a party.

Predicate Offense for Money Laundering (c. II.2):

192. All offenses under Afghan law are predicates to money laundering under Article 3 of the AML LD. Terrorism financing constitutes an offense under the CFT LD and may therefore be a predicate.

Jurisdiction for Terrorist Financing Offense (c. II.3):

193. The CFT LD provides for the jurisdiction of Afghan courts in a number of instances, including when the offense was committed in Afghanistan, and when the acts occurred or the perpetrators reside outside Afghanistan, without requiring that the act and the perpetrator be in the same country (Article 17). Afghan courts therefore also have jurisdiction over the domestic financing activity of overseas events.

The Mental Element of the TF Offense (applying c. 2.2 in R.2):

194. The offense applies to those who willfully provide funds, thus requiring knowledge. However, unlike the AML LD, the CFT LD does not specifically allow for that knowledge to be inferred from objective, factual circumstances, and the authorities did not clarify how knowledge would be established in this case.

Liability of Legal Persons (applying c. 2.3 & c. 2.4 in R.2):

195. Criminal liability for terrorist financing extends to corporate entities other than those owned by the Afghan government, without prejudice to the conviction of individual perpetrators for the same acts (Article 5 CFT LD).

196. No information was provided on the possibility (or lack thereof) of parallel sanctions, nor on the definition of State-owned (see write up under 2. 2 above).

Sanctions for FT (applying c. 2.5 in R.2):

197. The penalty applicable to natural persons found guilty of having funded terrorism is imprisonment for not less than five years or more than fifteen years and a fine of not less than Af 250,000 (approx. US$5,540) to Af 1,500,000 (approx. US$33,270). Complicity and other forms of assistance provided for the commission of the terrorist financing offense are subject to the same penalties (Article 4 CFT LD).

198. Non-Government owned corporate entities are subject a fine of not less than Af 1,500,000 (approx. US$33,270) and not more than Af 4,500,000 (approx. US$99,820). In addition, they may also be:

  • a) banned permanently or for a maximum period of five years from directly or indirectly carrying out business activities; or

  • b) ordered to close permanently or for a maximum period of five years their premises that were used for the commission of the offense; or

  • c) dissolved if they were created for the purpose of committing the offense; or

  • d) required to publicize the judgment in the press or any other audiovisual media (Article 5 of the CFT LD).

199. It is unclear whether legal entities that are partially owned by the Afghan State and that engage in terrorist financing activities may be sanctioned.

200. The commission of the offense in the context of a criminal organization constitutes an aggravating element in the sanctioning of both natural and legal persons, and the penalty may in these circumstances be increased to imprisonment of not less than fifteen years to life imprisonment (for natural persons) and a fine not less than Af 1,000,000 (approx. US$22,180) and not more than Af 2,000,000 (approx. US$44,360; Article 6 of the CFT LD).

Statistics (R.32)

201. The law enforcement authorities mentioned that they had investigated terrorist financing in 23 instances, all of which also included an investigation into money laundering. None of these cases have been transmitted to the courts. The terrorist financing offense therefore remains untested.

Analysis of effectiveness

202. The fact that the CFT LD is still pending final Parliamentary approval five years after having been transmitted to the National Assembly raises serious concerns about Afghanistan’s commitment to AML/CFT. This means that the entire CFT framework could be deprived of a legal basis if Parliament were to reject the decree.

203. The Afghan terrorist financing offense is in line with several elements of the ICSFT in the sense that it covers the provision and collection of funds and property for the purpose of committing a terrorist act. It nevertheless falls short of the standard notably because it fails to criminalize the collection of funds for and their provision to terrorist organizations and individual terrorists (for instance as a mean of general support unrelated to a terrorist act). To date, while 23 investigations have been undertaken, no charges have been laid, no prosecutions have been commenced and no sanctions have been imposed in application of the terrorist financing offense.

204. The risk of terrorist financing in Afghanistan, however, is particularly high and should have warranted strong action from the Afghan State. Following the 1999 adoption of resolution 1267 and its successor resolutions, the UN Security Council designated a considerable number of terrorist individuals and organizations that have, in one way or another, ties with Afghanistan. The authorities recognize that terrorist financing continues to be a persistent problem. They mentioned that, although the amounts involved are relatively small by comparison with that of the narcotics trade, there is much evidence to support the contention that there is a significant overlap between the two. They also indicated that the financing of terrorism is mainly cash-oriented although there have been alleged cases where terrorist funds were moved through the banking sector.

205. The fact that, nine years after the fall of the Taliban regime and six years after the entry in force of the CFT LD, no individuals or organizations have been sanctioned for terrorist financing constitutes a major failure of the Afghan law enforcement and judiciary. It also raises serious concerns with respect to Afghanistan’s role in the global fight against terrorism. The lack of expertise in the fight against economic crime at all stages of the criminal process and pervasive corruption may both be factors that impede the effective implementation of the terrorist financing offense.

2.2.2. Recommendations and Comments

206. In order to comply fully with Special Recommendation II, the authorities are recommended to:

  • Amend the CFT LD where necessary and obtain Parliamentary approval on an expedited basis;

  • Ensure that, as security improves, the CFT framework is progressively implemented in the whole territory;

  • Criminalize the collection of funds for and their provision to terrorist organizations and terrorist individuals;

  • Criminalize the organization, direction, motivation of individual terrorist and the contribution to the commission of a terrorist financing offense by an individual;

  • Criminalize the funding of any of the terrorist offenses defined in the treaties listed in annex to the ICSFT;

  • Ensure that the terrorist financing offense extends to any funds, whether from a legitimate or illegitimate source;

  • Ensure that, for successful prosecution, it is not required that the funds and property be linked to a specific terrorist act;

  • Extend criminal liability for TF to corporate entities that are partially owned by the Afghan government;

  • Ensure that intention can effectively be inferred from objective factual circumstances;

  • Ensure that criminal sanctions do not preclude the possibility of parallel civil or administrative proceedings if such proceedings are available;

  • Vigorously pursue TF investigations and prosecutions.

2.2.3. Compliance with Special Recommendation II

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2.3. Confiscation, freezing and seizing of proceeds of crime (R.3)

2.3.1. Description and Analysis

Legal Framework

207. The AML LD sets out a framework specifically designed to enable the freezing, seizing and confiscation of tainted property in the course of prosecutions for money laundering (Articles 31 to 37). The law defines “freezing” as “provisionally (i) deferring the execution of a transaction, or (ii) prohibiting or restraining the transfer, alteration, conversion, disposition or movement of funds and property, on the basis of an order or directive from a competent authority” (Article 2 (e). As mentioned above, however, due to the lack of parliamentary review of the AML LD within the timeframe prescribed in the Constitution, it is not clear that this framework is valid and constitutional. Provisional and confiscation measures applicable to predicate offenses are limited.

208. In the decree, “seizure” means “provisionally assuming custody or control of funds and property by a competent authority on the basis of an order issued by a court,” while “confiscation” is “the permanent deprivation of funds and property by final order of a competent court whereby the ownership of such funds and property and title, if any, evidencing such ownership, is transferred to the state” (Article 2 (o) and (a)).

209. While some freezing orders have been issued by the FIU on the basis of this framework, no assets have been confiscated in application of the AML LD.

210. Confiscation is defined as “the permanent deprivation of funds and property by final order of a competent court whereby the ownership of such funds and property and the title, if any, evidencing such ownership, is transferred to the state” (article 2 (a)).

Confiscation of Property related to ML, TF, or other predicate offenses including property of corresponding value (c. 3.1):

211. The AML LD provides for the confiscation of funds and property:

  • used or intended to be used to commit the offense;

  • that constitute the proceeds of “the offence”, including funds and property intermingled with such proceeds or derived from or exchanged against such proceeds;

  • that constitute an income and other benefits obtained from such funds;

  • the funds and property “that have been transferred to any party unless the owner of such funds and property can establish that he paid [sic] the court finds that the owner of such funds and property acquired it by paying a fair price or in return for the provision of services corresponding to their value or on any other legitimate grounds, and that he was unaware of its illicit origin (Article 32).

212. In the first bullet point above, the law refers only to the proceeds of “the offense,” namely the money laundering offense. It does not allow the confiscation of the proceeds of the predicate offenses. This is compensated to a limited extent by two other texts of law: the PC which, in its general provisions allows for the confiscation of the proceeds of predicate offenses criminalized in the PC (namely terrorist acts, bribery, fraud, counterfeiting currency, theft, smuggling and forgery) (Article 6, para. 1); and the Counter-Narcotics Law which calls for the confiscation of the proceeds of drug-trafficking related offenses (Article 42).

213. The CFT LD enables the confiscation of funds and property,58 proceeds of the terrorist financing offense as well as funds and property that are derived from the proceeds, if they are used or intended to be used to commit the offense (i.e. the terrorist financing offense).

214. With the exception of the Counter Narcotics Law, neither the AML LD, CFT LD nor other pieces of legislation enable the authorities to confiscate the instrumentalities used in, or intended for use in the commission of the money laundering offense or its predicates.59 Both decrees provide for the possibility to confiscate funds and property of equivalent value when the assets to be confiscated cannot be produced (Article 32 para. 3 AML LD and Article 8 para. 1 (e) of the CFT LD),60 but there seems to be no equivalent provision in other pieces of criminal law that would enable the same with respect to predicate offenses.

215. The AML LD also provides that confiscation may be ordered even in the event that the asset generating offense cannot be prosecuted, be it because the perpetrator(s) is (are) unknown or because “there is a legal impediment to the prosecution” of that offense (Article 33).

Confiscation of Property Derived from Proceeds of Crime (c. 3.1.1 applying c. 3.1):

216. The “income and other benefits” obtained from the funds and property used or intended to be used to commit the money laundering offense or from the proceeds of crime are part of the property subject to confiscation under the AML LD (Article 32). It was not established however that this would apply to income and other benefits that derive directly as well as indirectly from the proceeds of the money laundering offense (Article 32 para. 2 only applies in the case where funds and property have been intermingled with funds of legitimate source).

217. Funds and property may be confiscated regardless of whether they are held by the defendant or a third party (Article 32 para. 1 (d) but the rights of the bona fide third party are nevertheless protected as described below).

218. The CFTLD equally provides for the confiscation of proceeds of the terrorist financing offense (Article 8 para. 1 (a), regardless of who owns them, except if the owner is a bona fide third party (article 8 para. 1 (c). Proceeds are defined as any funds and property derived from or obtained, directly or indirectly, through the commission of the terrorist financing offense (Article 1 para. 3).

Provisional Measures to Prevent Dealing in Property subject to Confiscation (c. 3.2):

219. The AML LD and the CFT LD allow for provisional measures to be taken to secure the property subject to confiscation, but, with the exception of the proceeds of drug trafficking, there is no framework to order the freezing or seizing of the proceeds of the predicate offenses to money laundering.

220. According to the AML LD, FinTRACA may issue an order to freeze funds or property or a transaction if, by reason of the seriousness or urgency of the case, it considers the freezing necessary (Article 30 para. 1). The authorities confirmed that FinTRACA may use its freezing powers both on its own accord (i.e. during the analysis of a suspicious transaction report (STR) or of a large cash transaction report), and upon request of the law enforcement agencies (i.e. where no STR has been filed). The funds and property that FinTRACA may freeze are the same as the property subject to confiscation (Article 30 para. 5).

221. FinTRACA may only order freezing for a period not exceeding seven days. It may refer the case to the public prosecutor if the freezing order should be maintained for a longer period. An extension of the freezing order for an additional fourteen days is possible upon application to the court (Article 30 para. 1 and 2 of the AML LD). The competent court may then issue an order authorizing the prosecutor to seize funds and property associated with the offense that is the subject of an investigation of money laundering, as well as the proceeds of this offense and any evidence facilitating the identification of such funds and property or proceeds (Article 31).

222. Since its establishment in 2007, FinTRACA has issued 22 freezing orders for a total amount of US$1,488,442 in all 22 cases, FinTRACA sent the files to the AGO with a request to maintain the freezing order. In one instance, the case was submitted to the court: the defendant was subsequently convicted for corruption (but not money laundering) and the amounts held in his four accounts were confiscated. In all remaining cases, an order was issued to freeze the accounts until further notice but no money laundering charges have been brought before the courts. The authorities did not know whether these funds were still frozen at the time of the assessment.

223. Article 44 of the AML LD also gives the judicial authorities the powers to order the seizure of financial and commercial records, if there are “strong grounds for suspecting” that these documents “are or may be used by persons suspected of participating in” money laundering or its predicates. The decree does not however enable the courts to freeze or seize assets; measures such as freezing a bank account are not provided for.

224. As far as predicate offenses are concerned, provisional measures may only be ordered with respect to evidence, instrumentalities and proceeds of drug trafficking (Article 45 para. 5 of the Counter-Narcotics law) and terrorist financing (described below). While the PC allows for the confiscation of funds and assets linked to those predicate offenses criminalized under the PC, it does not allow for provisional measures to be taken to secure the property subject to confiscation.

225. Provisional measures may be taken in the context of the CFT LD through the “competent court” (rather than through FinTRACA). These measures include “the freezing of funds and property and financial transactions involving assets, regardless of their nature, that can be seized or confiscated” (Article 15 of the CFT LD). The competent court may also seize assets associated with the offense that is the subject of the investigation in particular funds and property used or intended to be used to commit the TF offense, as well as the proceeds of these offenses and all evidence facilitating heir identification (Article 16).

Ex Parte Application for Provisional Measures (c. 3.3):

226. According to the authorities, in practice, the freezing and seizing orders (issued by FinTRACA and the courts) are made ex-parte to avoid the risk of assets being removed prior to the implementation of the orders. But once the orders have been issued, the AML LD specifically requires the FIU and, if a longer freeze is required, the public prosecutor, to communicate their freezing orders “immediately to the funds and property owner or reporting entity” (Article 30 para. 1 and 2 of the AML LD).

Identification and Tracing of Property subject to Confiscation (c. 3.4):

227. The various law enforcement agencies derive their powers mainly from the Police Law (notably Articles 15 and 17) and the Interim Code for Courts.

228. The police may “search persons, things and houses” under specific circumstances, mainly in case of imminent danger or commission of a crime (Article 9 of the Police law).

229. The judicial police (i.e. in the case of money laundering, the MCTF, NPA SIU and IIU) perform their duties under the direction and supervision of the Saranwal (prosecution). Their role is to detect crimes, collect evidence and seek suspects in the pursuit of justice (Article 29 of the Interim Code for Courts). Judicial police officers may, in case of flagrante delicto and whenever there are grounded reasons to believe that urgent action is needed to preserve the evidence, conduct preliminary investigations which notably include searches of premises and seizure of objects and documents.

230. The AML LD enables the judicial authorities to take specific measures (“special investigative techniques”) for the purpose of obtaining evidence of the money laundering offense or its predicates, such as monitoring bank accounts and wire tapping (Article 44). These measures can be ordered when there are “strong grounds” to suspect that the “accounts (…) or documents are or may be used by the persons suspected of participating” in the money laundering offense or its predicates. All these powers may prove useful in the identification and tracking of property subject to confiscation but have not been used to date. It is therefore unclear what would, in practice, constitute “strong grounds” to suspect the commission of the money laundering offense or one of its predicates, and whether this threshold is adequate or on the contrary too limitative to enable an effective use of the special investigative techniques.

231. The Counter-Narcotics Law specifically provides for a range of identification and tracing measures of the evidence, instrumentalities and proceeds of drug trafficking; they include searches of persons, property and vehicles, covert surveillance, intrusive or electronic surveillance and undercover operations (Articles 43 to 51).

232. There are no other specific provisions that apply to terrorist financing.

Protection of Bona Fide Third Parties (c. 3.5):

233. Article 36 para. 1 of the AML LD provides that confiscated funds and property remain “encumbered, up to their value, by any rights in rem lawfully established in favor of third parties.” Anyone who claims to have a right over the assets or funds that are the subject of a confiscation order may appeal to the jurisdiction that issued the confiscation order within one year of that order (Article 37 of the AML LD).

234. The CFT LD also provides for the protection of the rights of bona fide third parties by enabling them to file a petition in court within one year of confiscation to defend their rights (Article 12).

235. Neither the AML LD nor the CFT LD enable however bona fide third parties to ensure that their rights are not prejudiced during the pre-confiscation stage, namely when identification, tracing, or provisional measures are taken. The Counter-Narcotics Law, however, does allow for adequate protection of the rights of bona fide third parties whose property may be seized, frozen or confiscated as a result of drug trafficking.

Power to Void Actions (c. 3.6):

236. Under the AML LD, “any legal instrument” executed for a fee or free of charge, inter vivos or mortis causa, is void if its purpose was to prevent the implementation of the confiscation measures provided for in the AML LD (Article 35). In the case of a contract involvement a payment, the “buyer shall be reimbursed only for the amount actually paid.”

237. There is no equivalent provision with respect to predicate offense.

238. The CFT LD also provides that “legal document prepared for the custody of funds or property […] are void” (Article 10).

Statistics (R.32)

239. As mentioned above, FinTRACA ordered the freeze of 22 accounts related to money laundering investigations. No other provisional measures were taken and no funds have been confiscated on the basis of the AML LD. Similarly, the authorities have not made use of provisional and confiscation measures of funds and assets suspected of being linked to terrorist financing. No information was provided on the number of confiscation orders that have been issued on the basis of the predicate offenses other than the one case of corruption mentioned above.

Additional Elements (Rec 3)—Provision for a) Confiscation of assets from organizations principally criminal in nature; b) Civil forfeiture; and, c) Confiscation of Property which Reverses Burden of Proof (c. 3.7):

240. Article 34 of the AML LD allows for the confiscation of property of which a criminal organization has power of disposal. It also reverses the burden of proof by providing that the property is to be confiscated unless its lawful origin is established. A criminal organization is defined as “any structured group of two or more persons acting in concert with the aim of committing one or more criminal offences, in order to obtain, directly or indirectly, funds and property or any kind of financial or other material benefit” (Article 2 para. 1(b) of the AML LD).

Analysis of effectiveness

241. In the case of money laundering and terrorist financing offenses, the framework adequately provides for provisional measures and confiscation of all property subject to confiscation under the standard, except instrumentalities. In the absence of conviction for money laundering and terrorist financing, however, the confiscation framework provided by the AML LD and the CFT LD has never been used. Freezing measures have been taken without difficulty by FinTRACA in a number of suspected money laundering cases, but the authorities have no experience in seizure, be it in the course of an investigation into money laundering or terrorist financing. Bona fide third parties may challenge a confiscation order, but have no possibility to ensure that their rights are not prejudiced by provisional measures.

242. The conditions under which the authorities may undertake “special investigative techniques” in the course of an investigation into money laundering seem reasonable, but it is important that the courts do not interpret them in a too restrictive way.

243. In the case of terrorist financing offenses, similar provisions apply: provisional and confiscation measures may be ordered with respect to property – other than instrumentalities – linked to a terrorist financing offense.

244. With the exception of drug trafficking cases, there is no possibility to seize or freeze the proceeds from, or instrumentalities used, or to be used in the commission of the predicate offense to money laundering, nor to prevent or void actions taken to prejudice the confiscation of such assets.

2.3.2. Recommendations and Comments

245. In order to comply fully with Recommendation 3, the authorities are recommended to:

  • Amend the AML LD where necessary and obtain Parliamentary approval on an expedited basis to ensure that the AML framework, and in particular the provisional and confiscation measures applicable to money laundering, terrorist financing and all predicate offenses, has a sound legal basis;

  • Ensure that, as security progresses, the AML framework is implemented in the entirety of the territory of Afghanistan;

  • Enable the confiscation of the proceeds of all predicate offenses;

  • Ensure that confiscation would apply to income and other benefits that derive directly as well as indirectly from the proceeds of crime;

  • Enable the confiscation of instrumentalities used or to be used in the commission of all predicate offenses and terrorist financing;

  • Ensure that provisional measures (including seizing and freezing) may be taken in respect to all predicate offenses to money laundering;

  • Ensure that bona fide third parties can defend their rights at all stages (i.e. not only after a confiscation order has been issued);

  • Ensure that steps may be taken to prevent or void actions (whether contractual or otherwise) that would prejudice the authorities ability to recover all property subject to confiscation.

2.3.3. Compliance with Recommendation 3

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2.4. Freezing of funds used for terrorist financing (SR.III)

2.4.1. Description and Analysis

Legal Framework

246. The CFT LD addresses, albeit in a limited way, the freezing of funds and property of individuals and organizations designated by the UN Security Council acting under Chapter VII of the UN Charter. No other procedures are in place for freezing of funds used for terrorist financing in other circumstances, which significantly hampers the actions that the authorities may take in the fight against terrorism and it’s financing. Moreover, as mentioned above, there are serious concerns about the constitutionality of the CFT LD, and, consequently, of any measure based on the decree.

247. It is also worth mentioning from the outset that very little information was provided to the assessment team on the implementation of the freezing mechanisms called for under Special Recommendation III, suggesting that practical experience in the matter is scarce.

Freezing Assets under S/Res/1267 (c.III.1)

248. Article 13 of the CFT LD provides that the President may, by executive order, direct the freezing of funds and property of individuals and organizations designated by the United Nations Security Council (UNSC) acting under Chapter VII of the UN Charter. This is the only reference in law to the freezing measures called for under UNSCR 1267 and there are no decrees, regulations or other texts that would set out the applicable procedure or provide guidance on the implementation of the freezing order.

249. According to the authorities, one freezing order was issued under Article 13 in 2007 on the basis of UNSCR 1267: No copy of the President’s order was however provided to the assessment team. The response to the detailed assessment questionnaire suggest that, before the President may issue a freezing order, a “request” is addressed to the Afghan Ministry of Foreign Affairs, which then confidentially forwards it to the relevant domestic authorities, i.e. the Ministry of Interior, NDS and Da Afghanistan Bank. These authorities report back to the President who then issues a freezing order. This procedure involves a number of different steps before a freezing order may be issued, and may potentially cause significant delay in the freezing mechanism.

250. According to the authorities, the freezing order that was issued was the result of an STR filed by a bank which found a positive match in its list of customers with the UNSCR consolidated list. The authorities mentioned that FinTRACA ordered the account to be frozen, and forwarded the case to the NDS and AGO. A request was made for a Presidential order to maintain the freeze, but it was denied and the freezing order was lifted, despite the clear positive match. The holder of the account subsequently left the country, taking with him the entirety of the amounts on his account (some US$32,000). Freezing measures required under UNSCR 1267 are not however subject to the UN members’ discretion: the assets of the listed persons and entities must be frozen. By lifting the freezing order, Afghanistan violated its obligations under UNSCR 1267.

Freezing Assets under S/Res/1373 (c. III.2):

251. Article 13 of the CFT LD only deals with the freezing of funds and property of persons and entities that have been designated by the UNSC. There is no clear mechanism in place for the implementation of UNSCR 1373. According to the authorities, the requests made under UNSCR 1373 are dealt with in the same manner as described above. No information was provided on the number of requests received and presidential decrees issued as a result. The authorities did mention however that no account had been frozen in implementation of a foreign request.

Freezing Actions Taken by Other Countries (c. III.3):

252. According to the authorities, a request to give effect to another country’s freezing actions would follow the general provisions on mutual legal assistance set out in the CFT LD, but no mention was made of the authorities in charge of examining the requests, the number of requests received and their result.

Extension of c. III.1-III.3 to funds or assets controlled by designated persons (c. III.4):

253. The CFT LD only makes reference to “funds and property” of individuals and organizations designated under UNSCR 1267 without any indication of the extent of their ownership or control.

Communication to the Financial Sector (c. III.5):

254. The UNSCR 1267 Sanction Committee consolidated list of designated persons and its updates have been forwarded by FinTRACA to the banking sector on three occasions only. These communications were made without imposing any requirement on financial institutions to compare their list of customers against the UN list, and without requiring them to freeze the funds and inform FinTRACA in case of a positive match.

Guidance to Financial Institutions (c. III.6):

255. No guidance has been given to financial institutions on the implementation of the freezing measures.

De-Listing Requests and Unfreezing Funds of De-Listed Persons (c. III.7):

256. Two different procedures are available for the delisting of designated persons.

257. Article 14 of the CFT LD sets out a procedure to contest a freezing measure taken under Article 13 that gives the Afghan Supreme Court (rather than the UNSC) the possibility of lifting a freezing order issued under UNSCR 1267. It provides that any individual or organization whose funds and property have been frozen pursuant to article 23 and who consider that they were included on the list as a result of an error may seek to have their names removed from the list by submitting a request to this effect to the Supreme Court within thirty days of publication of the President’s order, indicating all factors that could demonstrate the error. It also provides that the Supreme Court’s decision in this respect is final. This provision of the CFT is not sufficiently precise in its reference to “the list” and may contravene Afghanistan’s obligation under UNSCR 1267: as long as Article 13 refers to the list that the President may have drawn, the powers granted to the Supreme Court do not necessarily raise an issue under the standard; if the list refers, however, to the UNSCR 1267 list of designations (or the President’s list that duplicates the UNSCR 1267 list), Article13 is not in line with the standard in the sense that it enables the Supreme Court to take a decision (namely to remove a person or entity’s name from the list of designations) that should remain the prerogative of the UN Security Council.

258. In their responses to the DAQ, the authorities mentioned that, in practice, a different approach is taken: requests for delisting are addressed to the Security Council of Afghanistan, which then sends them to the Ministry of Foreign Affairs for transmittal to the Afghan Permanent mission in New York, which then prepares a Note verbal to the Chairman of the UNSC 1267 committee.

259. This approach is consistent with international rules in that matter. The mechanism established under Article 13, however, as mentioned above, is in contradiction with Afghanistan’s obligations under UNSCR 1267 in the sense that it enables the Afghan Supreme Court to lift the freezing measure while the resolution affords individual jurisdictions no leeway and no flexibility in that matter beyond cases of mistaken identities.

260. It is unclear whether any request for delisting has been made through either of these procedures.

Unfreezing Procedures of Funds of Persons Inadvertently Affected by Freezing Mechanism (c. III.8):

261. There are no procedures to allow for the unfreezing of funds or other assets of persons or entities inadvertently affected by a freezing mechanism.

Access to frozen funds for expenses and other purposes (c. III.9):

262. There are no measures in place to allow access to frozen funds or other property to cover expenses as set out in UNSCR 1452.

Review of Freezing Decisions (c. III.10):

263. A review process is set out in Article 13 of the CFT LD as described above.

Freezing, Seizing, and Confiscation in Other Circumstances (applying c. 3.1-3.4 and 3.6 in R.3, c. III.11):

264. Article 15 of CFT LD enables the competent court acting either “by virtue of its office or at the request of the public prosecutor’s office”, to order any provisional measure, including the freezing of funds and property and financial transactions involving assets regardless of their nature, that can be seized or confiscated. Article 16 addresses also seizure of assets associated with the TF offense under investigation, in particular: funds and property used or untended to be used to commit the [terrorist financing offense], as well as the proceeds of these offences and all evidence facilitating their identification.”

265. Article 8 of the CFT LD enables the competent court to confiscate the following funds and property:

  • a) “Property and funds as well as the proceeds of the TF offense if they are used or intended to be used to commit the offence;

  • b) Funds and property [that] came from the proceeds, derivatives or exchange of the offense;

  • c) funds and property listed in paragraph a) and b) except if the owner of the funds or property can prove that it has been transferred to him in exchange of services provided by a transferee or fair value has been paid for such funds and property or acquired through any other legitimate way and the transferee was not aware of the origin of the funds and property;

  • d) Funds and property directly or indirectly connected to an offense and are mixed with legitimate funds and property of equal value to that of the TF offense committed.”

266. The law also provides that when the funds and property to be confiscated cannot be produced, confiscation may be ordered for their value, including but not limited to any funds and property belonging directly or indirectly to a person convicted of a TF offense, or funds and property acquired from the person convicted by his spouse, cohabiter or dependent children, unless fair value has been paid for such funds and property.

267. In addition, funds and property controlled by criminal organizations may be confiscated “without considering it is link to the offense committed [sic],” i.e. without the need to prove a link with a specific offense (Article 9 of the CFT LD).

Protection of Rights of Third Parties (c. III.12):

268. Any individual or organization that believes that they have rights in the confiscated assets can file a petition with the competent court within one year from the date of the confiscation (Article 12 of the CFT LD).

Enforcing the Obligations under SR III (c. III.13):

269. Although there is no explicit provision to this effect (neither in the CFT LD nor in the AML LD), according to the authorities, FinTRACA is the competent authority to enforce the obligations under the freezing of terrorist funds provisions under Article 28 of the AML LD which gives the FIU general powers to prevent money laundering. However, the AML LD does not constitute an adequate legal basis in the context of freezing obligations under Special Recommendation III because it only deals with money laundering. Furthermore, FinTRACA has no enforcement powers as such.

Statistics (R.32)

270. The authorities forwarded the UNSCR 1267 Sanction Committee consolidated list of designated persons on three occasions only, and solely to the banking sector. As mentioned above, one bank account was frozen in application of UNSCR 1267 but the authorities subsequently lifted the order, despite the account holder being listed in the UNSCR 1267 consolidated list.

Additional Element (SR III)—Implementation of Measures in Best Practices Paper for SR III (c. III.14):

271. No consideration has been given to the measure indicated in the Best Practices Paper for SR III.

Additional Element (SR III)—Implementation of Procedures to Access Frozen Funds (c. III.15):

272. No procedures have been adopted to allow for access to funds frozen pursuant to UNSCR 1373.

Analysis of effectiveness

273. The current freezing framework does not comply with the standard on a number of points notably because it is incomplete with respect to UNSCR 1267 and provides no legal basis for the implementation of UNSCR 1373. It is furthermore very rarely used, despite the high risk of terrorist financing in Afghanistan. The fact that the authorities allow themselves some level of discretion in the implementation of the UNSCR 1267 obligations, and the fact that they have, in one case of positive match, used that discretion to release funds that were subject to mandatory freeze, raise particular concerns.

2.4.2. Recommendations and Comments

274. In order to comply fully with Special Recommendation III, the authorities are recommended to:

  • Ensure that there is a sound legal basis to implement the UNSCRs;

  • Ensure that, as security improves, the AML framework is progressively implemented in the whole country;

  • Clarify the freezing mechanism under UNSCR 1267 or clarify its meaning so it can be used effectively to freeze without delay;

  • Establish a clear legal basis to implement the freezing obligations under UNSCR 1373 and clear procedures to meet the obligations;

  • Establish clear procedures to consider and implement as necessary to give suit to other countries’ designations and requests for freezing of terrorist assets;

  • Ensure that funds and property subject to freezing orders extend to all funds and other assets listed under Criterion III.4;

  • Establish clear procedures to allow for domestic freezing of terrorist assets;

  • Establish clear procedures for delisting;

  • Ensure that freezing, seizing and confiscation measures in other circumstances are not unduly restrictive;

  • Establish appropriate procedures to allow for the unfreezing of funds or other assets of persons or entities inadvertently affected by a freezing order;

  • Ensure there are measures to allow access to frozen funds or other property to cover expenses as set out in UNSCR 1452;

  • Establish clear obligations for the private sector to implement freezing orders;

  • Provide clear guidance to the private sector in respect of their freezing obligations;

  • Ensure effective monitoring of compliance with all freezing obligations under SR III.

2.4.3. Compliance with Special Recommendation III

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Authorities

2.5. The Financial Intelligence Unit and its Functions (R.26)

2.5.1. Description and Analysis

Legal Framework

275. The Financial Reports and Analysis Centre of Afghanistan (FinTRACA), Afghanistan’s financial intelligence unit (FIU), was established by virtue of the AML LD in 2004. The decree describes the main functions of the FIU, notably in Chapters IV and V.

Establishment of FIU as National Centre (c. 26.1):

276. Article19 of the AML LD establishes the FIU under the authority of the DAB. It provides the FIU with an independent decision-making authority to exercise its functions under the LD, namely for receiving (Article 23), requesting (Article 26), analyzing (Article 23) suspicious transaction reports (STRs), large cash transaction reports (LCTRs) and other relevant information concerning money laundering and terrorist financing activities. The power to disseminate the disclosures to the prosecutor is limited to cases where there are grounds to suspect money laundering (Article 38).

277. Receipt of STR and other relevant information: Article 16 of the AML LD requires reporting entities to file an STR when they (a) suspect that any transaction or attempted transaction may be related to or derived from the commission of an offense; and (b) suspect that funds are linked or related to, or are to be used for terrorism, terrorist acts or by terrorist organizations. STRs are submitted to FinTRACA “in a form and by any rapid means of communication as may be determined in regulations of Da Afghanistan Bank.” (For more details on reporting, please refer to section 3.8).

278. In addition and according to Article 12, paragraph 1 of the AML LD, reporting entities should report to the FIU, as STRs, i) all complex, unusual large transactions, and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose; and ii) business relationships and transactions with persons from countries which do not or insufficiently apply AML/CFT requirements equivalent to those contained in the AML LD. This requirement has never been implemented; reports are filed for suspicious transactions and not those specified in Article 12.

279. Also, according to Article 15 of the AML LD “a reporting entity shall report to the Financial Intelligence Unit in such form and manner and within such period as may be prescribed in regulations by Da Afghanistan Bank any transaction in cash in an amount as may be so prescribed, by Da Afghanistan Bank, unless the recipient and the sender are financial institutions.” Article 1, paragraph 1.2.b. of the AML/CFT RR defines large cash transaction as a transaction in which one party receives, pays, or otherwise transfers, cash, bullion, other precious metals, or precious stones, or any other monetary instrument with a value equal to or exceeding Af 500,000 (around US$11,620). A large cash transaction also includes the completion of two or more such transactions by or on behalf of the same person during any two consecutive business days when the total value of the transactions is equal to or exceeds Af 500,000 (around US$11,620). MSPs regulation sets out the same requirements for this sector.

280. In practice, FinTRACA receives STRs from banks and LCTRs from both banks and MSPs.

281. Finally, according to Article 6, paragraph 7 of the AML LD, the compliance officer of reporting entities should be authorized to inform FinTRACA once per month of all reported cross-border transfers of cash and other negotiable instruments and forward the copies of reports made by people leaving or entering Afghanistan. Currently, the requirement on currency reporting (described in detail under SRIX) is only implemented with respect to outgoing travelers at Kabul International Airport (KIA), except at the VIP section of the airport. The assessment team was informed that 95% of the cash and bearer negotiable instruments reports (CNBIRs) are submitted by MSPs transporting cash to Dubai.

282. Analysis: According to article 23 of the AML LD, FinTRACA should receive the reports and analyze them on the basis of all relevant information available. A preliminary tactical analysis is conducted in order to examine the specific pieces of information contained in the STR. The operational analysis is limited to matching the information contained in the STRs to the information contained in FinTRACA’s internal database. The analysis focuses on the reported transactions and does not usually reach the next level to produce activity patterns, new targets, relationship among the subjects and accomplices and investigative leads and criminal profiles. FinTRACA does not conduct strategic analysis at this stage to further develop the knowledge base that would be useful in its future activities. (Please refer to criterion 26.3 for more details).

283. Dissemination: Pursuant to Article 38 of the AML LD, FinTRACA must immediately disseminate financial information to the prosecutor for investigation or action when there are reasonable grounds to suspect that an offence of money laundering has been committed.

Article1.3.6.1 of the AML/CFT RR included a requirement to disseminate STRs where there is a suspicion of financing of terrorism; however this regulation only applies to financial institutions. (Please refer to criterion 26.5 for more details).

284. In addition to the traditional powers of an FIU (receiving, analyzing and disseminating), the AML LD gives FinTRACA the power to:

  • Assist the customs in implementing the requirements of controlling the transportation of cash and bearer negotiable instruments. The employees of the FIU are considered authorized officer who have the power to require the declaration, search, and seize (Article 6 of the AML LD) (please see SRIX for additional details;

  • (i) Propose to competent bodies the enactment, change, amendment, or nullification of the relevant laws and regulations; (ii) participate in drawing up the list of indicators for recognizing suspicious transactions; and (iii) provide professional training to the staff of reporting entities, state bodies, and organizations with official authorizations (Article 28 of the AML LD);

  • Issue and order the freezing of funds and property or a transaction, in urgent and serious cases, for a period not exceeding seven days, which shall be communicated immediately to the funds and property owner or reporting entity (Article 30 of the AML LD- for more details, please refer to the details under Recommendation 3);

  • Examine records and inquire into the business and affairs of any reporting entity, other than the regulated entities under the regulation of DAB, for the purpose of ensuring compliance with the requirements of the LD (Article 39);

  • Enforce compliance of all reporting entities that are not supervised by DAB according to Article 40 of the AML LD. (i.e., revocation or suspension of business license, imposition of fine etc.).

Guidelines on Reporting STR (c. 26.2):

285. Feedback on the manner of reporting has been provided to banks. The AML/CFT RR specifies that STRs must be prepared in accordance with the specification published on the FinTRACA website (http://www.fintraca.gov.af) at the time of submittal. However, when time is critical, preliminary reports may be prepared and filed in any convenient format via any other available means that may facilitate rapid and secure transmittal of information including, but not limited to, telephone, courier, and secure electronic mail. Filing of a preliminary report does not release the reporting entity from the obligation to file an STR. True and accurate copies of all documents required to support the suspicion must be included as attachments to the report. Reports must be placed for delivery on magnetic, optical, or USB-compatible storage media. Supporting documents may be in paper form if no alternative is available. Delivered reports will be validated against the report preparation specifications. Those reports that cannot be validated by the FIU will not be considered as having been received.

286. Similar information was also provided to banks on the filing of LCTRs (for more details, please refer to details under Recommendation 19).

287. In addition, two forms specifying the data content for STRs and LCTRs were provided to banks. According to FinTRACA staff, a number of workshops were held for the commercial banks by FinTRACA staff who delivered information on indicators and typologies of suspicion based reporting.

288. Guidance to other financial institutions regarding the manner of reporting, including the specification of reporting forms, and the procedures that should be followed when reporting have been provided through the AML/CFT RR. Similar guidance was not provided to the institutions that are not regulated by DAB or to DNFBPs.

Access to Information on Timely Basis by FIU (c. 26.3):

289. According to Article 26 of the AML LD, the FIU must, upon request directly or indirectly, be granted access to databases of the public authorities in Afghanistan. Such authorities must then respond to these requests for information in an expeditious manner. In all cases, information thus obtained is to be used by the FIU only for purposes of exercising its functions as specified in this LD. FinTRACA and law enforcement authorities may exchange information on matters within the scope of the AML LD.

290. FinTRACA’s own database contains financial information gathered from STRs, LCTRs and CNBIRs, received so far from banks, MSPs and Customs.

291. Other administrative and law enforcement information is very difficult to gather for FinTRACA. In some cases, the information is collected using official correspondence. It enables the analysts to conduct preliminary analysis by matching the collected information to the one contained in the STR. The following table illustrates the information FinTRACA has access to, starting with the most accessible:

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292. Overall, FinTRACA does not appear to have the level of access to administrative and law enforcement databases necessary to properly undertake the analysis of STRs. AISA does not hold accurate information about the beneficial owners of companies. FinTRACA do not have access to administrative information such as land title information, immigration records, vehicle licensing information and tax records. It does not have access to law enforcement information: arrest records or charges laid, convictions and acquittals; investigation records, intelligence information and prison records.

Additional Information from Reporting Parties (c. 26.4):

293. According to Article 26, paragraph1 of the AML LD, FinTRACA may ask any reporting entity to submit any information, documentation and records, for the purposes of exercising its functions, and the requested reporting entity must comply with the request.

294. FinTRACA has requested additional information from banks on several occasions, but has not done so with regard to non-bank financial institutions and DNFBPs.

Dissemination of Information (c. 26.5):

295. Proactive Dissemination: FinTRACA has the authority to disseminate financial information to the prosecutor for investigation or action whenever there are reasonable grounds to suspect that an offence of money laundering has been committed (Article 38 of the AML LD). Article 1.3.6.1 of the AML RR included a requirement to disseminate STRs where there is a suspicion of financing of terrorism; however this regulation only applies to financial institutions. Therefore, it is not empowered to disseminate financial information related to terrorist financing reported by DNFBPs. Whenever there are reasonable grounds to suspect that a money laundering offense has been committed, FinTRACA should immediately disseminate a report of the facts, together with its opinion, to the prosecutor, who must then decide upon further action.

296. To date, the FIU has not determined any objective criteria to disseminate reports. The director general of the FIU decides on a case by case basis whether to file the STR or to disseminate the case to the prosecutor. Twenty one money laundering and in cases were deemed suspicious and have been forwarded to the AGO, which then determined that there was not sufficient evidence to launch an investigation.

297. According to the authorities, the level of evidence required by the AGO to start a judicial investigation is high. Since there were no follow up by the AGO in the twenty one cases, FinTRACA re-disseminated the cases to other law enforcement agencies for further collection of evidence after receiving a receipt notice from the AGO. Thus far, none of the reported cases have led to an investigation or a prosecution. (See more details under the analysis of effectiveness).

298. Currently, the FinTRACA is disseminating reports to different LEAs depending on the kind of suspicion. When there are grounds to suspect:

  • proceeds of counter narcotics, the reports are sent to the Sensitive Investigation Unit (SIU; no cases disseminated to date);

  • proceeds of corruption, kidnapping and organized crimes, reports are sent to the Major Crimes Task Force (MCTF) at the Ministry of Interior (MOI) (17 cases disseminated); and

  • TF cases, report are sent to the MCTF within the National Directorate of Security (NDS; 4 cases disseminated).

299. To be effective in prosecuting the cases, the prosecutor needs to lower the level of evidence required for starting an investigation and the FinTRACA needs to improve the quality of the reported STRs by enhancing the collection of information capacity and developing the analysis function.

300. Reactive Dissemination: FinTRACA disseminates information in response to a request received from domestic law enforcement agencies. According to Article 26, paragraph 3 of the AML LD, FinTRACA, DAB, and the LEAs may exchange information on matters within the scope of the AML LD. At the same time, Article 24 of the same LD requires FinTRACA to have measures in place for the protection of privacy and computerized databases.

Operational Independence (c. 26.6):

301. According to Article 19 of the AML LD, FinTRACA has independent decision-making authority for purposes of exercising its functions. Its budget is determined by the Supreme Council of DAB, which is composed of seven members that includes DAB Governor and his deputy. All members of the Supreme Council are appointed by the President of Afghanistan with the consent of the Parliament of Afghanistan.

302. FinTRACA’s director general is appointed by the Supreme Council for a term of five years renewable for one term. The Director should satisfy the requirements set out in Article 20 of Da Afghanistan Bank Law: He should be 1) a citizen of Afghanistan; 2) enjoy “recognized integrity”; 3) have a degree of higher education or extensive work experience preferably in economics, banking or law; 4) not be disqualified from serving; 5) not be an officer or a full time or part time employee, with or without remuneration, of a bank or other financial institution submitted by law to the DAB’s oversight; and 6) not be a member of the council of ministers, member of parliament or other high ranking official of the state.

303. The Director General may be suspended or removed by the Supreme Council for one of the following reasons: (i) becomes ineligible to serve pursuant to the reasons mentioned above in the text; (ii) has been convicted of an offense to the punishment of which is imprisonment, unless such conviction was motivated by his religious or political views or activities; (iii) has been declared bankrupt or unable to pay his debts by a court decision; (iv) has served during the immediately preceding five years as a member of the executive board, or as an authorized officer or administrator of a company that has been subject to conservatorship or receivership; (v) has, on grounds of personal misconduct, been disqualified or suspended by a competent authority from practicing a profession; (vi) has been unable to perform the functions of his office because of an infirmity of body or mind that has lasted for more than six months; and (vii) has engaged in significant violations of the law or in negligence from any duty imposed by the law, or has engaged in serious misconduct in the office, substantially prejudicing the interests of DAB.

304. FinTRACA’s director general, with the approval of the Governor, establishes the number and type of staff positions and has the power to hire and dismiss them.

305. In practice, the Supreme Council meetings are held every quarter and FinTRACA prepares its quarterly report for review by its members. FinTRACA has a separate operational budget for carrying out its activities as approved by the Supreme Council of DAB. The director general of FinTRACA is allowed to approve an expense of up to US$2,500 per item, which is consistent with the Procurement Law of Afghanistan.

306. Although the MOUs with foreign FIUs are signed by the Director of FinTRACA, the MOU between the FIU and the customs for regulating the transmission of CNBIR to FinTRACA and controlling cash couriers was signed by the Governor of the Central Bank. The signature of such document by the Governor could create confusion about the role and functions of FinTRACA’s director general and the FIU’s operational independence.

307. Finally, since FinTRACA is under the authority of DAB, it is subject to the internal audit department of DAB. To date, no such inspection has been conducted.

Protection of Information Held by FIU (c. 26.7):

308. The information held by FinTRACA is securely protected. FinTRACA staff required to maintain the confidentiality of the information held by the FIU by virtue of Article 21 of the AML LD: “the officers, employees, agents or such other persons appointed to posts in the Financial Intelligence Unit shall be required to keep confidential any information obtained within the scope of their duties, even after the cessation of those duties within the Financial Intelligence Unit. Such information may not be used for any purposes other than those provided for by this law and may not otherwise be disclosed except by order of a court of competent jurisdiction.”

309. The reporting entities secure and send information using a Pretty Good Privacy (PGP) public key for encryption provided to them by FinTRACA. FinTRACA servers are connected to a closed network and there is no connection with outside computers. Reports are received by a computer, which is connected to both terminals (internal network and the internet); the reports are then put on the servers and become available only to those individuals with access to the internal network. The server room is always locked and only authorized personnel are allowed to enter.

310. There is no log history to record all the queries made by FIU employees. Currently, there are no electronic IDs used to access to the building, however this system will be used when FinTRACA moves to its new premises in the coming months.

Publication of Annual Reports (c. 26.8):

311. FinTRACA has not yet released any statistics, trends analysis, and/or typologies developed from its activities. It manages its own website,61 which contains information on AML/CFT legislation and guidance.

Membership of Egmont Group (c. 26.9):

312. FinTRACA was accepted as an Egmont Group member in July 2010.

Egmont Principles of Exchange of Information Among FIUs (c. 26.10):

313. Pursuant to Article 27 of the AML LD, the FinTRACA may, spontaneously or upon request, provide, receive or exchange information with foreign FIUs and foreign counterparts performing similar functions with respect to reports of suspicious transactions, provided that this is done on a reciprocal basis, and that such counterparts are subject to confidentiality requirements similar to those applicable to FinTRACA. It may, for that purpose, conclude cooperation or other agreements with foreign counterparts. Upon receipt of a request for information or transmission from a foreign FIU regarding an STR, FinTRACA must respond to that request in an expeditious manner within the scope of the powers conferred by this law. Prior to forwarding personal data to foreign authorities, FinTRACA must obtain assurances that such information will be protected by the same confidentiality provisions as apply to similar information from domestic sources obtained by the foreign FIU and that the foreign authority will use the data solely for the purposes of fighting money laundering and financing of terrorism.

314. According to the authorities, FinTRACA takes the Egmont principles into account when it exchanges information with its overseas counterparts.

315. FinTRACA has signed information exchange agreements by way of MoU with eight foreign FIUs,62 which are all based on the Egmont Group’s Principles for Information Exchange between Financial Intelligence Units for Money Laundering Cases. In addition FinTRACA has an informal information sharing agreement by way of an exchange of letters with FinCEN (US FIU) which adheres to the same principles. In addition, negotiations are under way for signing MOUs with Japan and the UAE.

316. FinTRACA has not received or requested information from foreign counterparts until it joined the Egmont group in June 2010. Since then, it has received 62 requests and made 12 requests as follows:

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317. FinTRACA representatives mentioned that it usually takes them one week at the most to answer foreign requests. The assessment team was not able to verify this since no information or statistics on the number of replies were provided.

Adequacy of Resources – FIU (R. 30)

318. FinTRACA’s organization chart shows four main sections, namely:

  • Administration and IT Section: FinTRACA has six zonal officers who are responsible for technical expertise, outreach and awareness on the AML/CFT aspects of licensing and reporting of the MSPs in the provinces in addition to the implementation of the CNBIRs;

  • Compliance Section: responsible for ensuring compliance and implementation of AML & CFT policies and procedures by the reporting institutions. The sole employee of this section inspects the banks to check whether all the STRs and LCTRs were filed properly;

  • Analysis Section: involved in the analysis of reports received from various reporting entities. The section has four analysts and one law enforcement officer responsible to deal with dissemination of cases and other relevant information;

  • Regional Manager Section: responsible for the development and maintenance of the internal networking and the overall software development of FinTRACA’s databases. This section also handles the day-to-day administration and stationary issues.

319. The following chart shows the structure and staffing of FinTRACA. Not all the positions shown in the chart have however been filled:

320. At the time of the onsite visit, FinTRACA had a Director General who was appointed in 2009, the Manager for the Analysis and Liaison Unit and four analysts, two regional managers (one for Jalalabad and one for Kunduz), one IT expert and one compliance officer. The assessment team was informed that FinTRACA is planning to recruit other staff upon moving to the new premises.

321. The low percentage of STRs disseminated (6.6%) and high percentage of pending cases (26.7%) may indicate that that the Analysis Section, composed of four analysts who sometimes also conduct tasks other than those linked to the analysis of STRs, is not adequately staffed. (See information under statistics).

322. The assessment team was informed that the FinTRACA staff are, in addition to performing the FIU’s traditional functions of receiving, analyzing and disseminating STR and other information, involved in (i) licensing MSPs; (ii) conducting compliance visit to banks to ensure the quality and quantity of STRs, LCTRs; (iii) assisting Customs in implementing the requirements under Article 6 of the AML LD to ensure receiving CNBIR; (iv) transmitting (in 3 instances) the UNSCR lists to banks; (v) developing internal software; (vi) imposing sanctions on non compliant reporting entities for non compliance with AML/CFT requirements; and (vii) answering requests from domestic LEAs and assisting the High Office of Oversight in asset verification of public officials.

323. FinTRACA’s annual budgets for 2006 and 2008 were not separate from the DAB budget. The salaries of staff are still being determined and paid by the DAB. An independent budget has been allocated to FinTRACA since 2009 (around US$200.000 per year). Other costs (i.e. rent of the new premises; development of a fiber optic network; salaries of two senior staff) are covered by foreign donors.

324. The average salary of FinTRACA staff is much lower than the average for similar functions in the private sector. For this reason, several employees have left FinTRACA to work for banks, which is creating a problem of resources for FinTRACA.

325. Several softwares have been developed internally by FinTRACA and are available to the analysts:

  • FinTRACA’s Management and Analytic System collects the STRs, LCTRs and CNBIRs received and provides the analyst with the capacity for data mining;

  • The I2 enables the visualization of transactions;

  • The Index search helps detect missing information in STRs;

  • The Working Tracking System follows the progress of analyzed cases;

  • The List Management and Matching system matches the names of public agencies officials (i.e. ministries, banks) with the information contained in FinTRACA’s database.

326. FinTRACA has developed job descriptions for every position. When vacancies are announced, specific standards like education, skill sets, experience and expertise, are outlined in the job description. According to the authorities, although there are no clear written rules on the matter, prior to being hired a future employee must:

  • Undergo criminal record and other checks through the proper channel in the Ministry of Interior (MOI);

  • Undergo a medical checkup;

  • Evidence his/her educational qualifications by means of certification from the Education Ministry and Higher Education Ministry.

327. FinTRACA employees, when hired, must sign a confidentiality agreement. However, no code of ethics for the DAB or FIU employees has been developed.

328. There are different types of trainings given to FinTRACA staff by various international agencies and organizations such as the World Bank, IMF, APG, EAG, and the US Treasury. Training sessions abroad have also been made available to FinTRACA. The training provided so far covered issues such as basic understanding of an FIU, basic and advanced analysis techniques, national and international cooperation, risks posed by NGOs, and preparation in view of the AML/CFT mutual evaluation of countries. Some of examples of workshops to which FinTRACA staff took part are indicated below:

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Statistics (R.32)

329. FinTRACA maintains comprehensive statistics of STRs and LCTRs which are available in FinTRACA’s database.

330. Number of STRs reported by banks:

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331. Of the 648 STRs received:

  • 21 STRs (i.e. 3.3% of the total) were disseminated to LEAs;

  • 455 STRs (i.e. 70% of the total) were archived;

  • 173 STRs (i.e. 26.7% of the total) are still being analyzed.

332. As mentioned above, so far, the other reporting entities have not filed STRs.

333. Number of LCTRs reported by banks:

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334. FinTRACA disseminated twenty one cases to the AGO, which, however, refused to launch an investigation, citing lack of evidence. These cases were forwarded to the MCTF and SIU for further evidence gathering. None of these cases were sent to the AGO by the MCTF or the SIU yet since they are still under investigation and some have been classified.

335. FinTRACA does not review periodically the effectiveness of the system to combat money laundering and terrorist financing.

Analysis of effectiveness

336. FinTRACA became operational and is receiving STRs and LCTRs from banks and reports from customs. It disseminated several reports to the prosecutor and exchanged information with LEAs. It also became an Egmont Group member and exchanged information with several counterparts.

337. However, The fact that the AML LD is still pending final Parliamentary approval five years after having been transmitted to the National Assembly raises serious concerns about Afghanistan’s commitment to AML/CFT. This means that the entire AML/CFT framework could be deprived of a legal basis if Parliament were to reject the decrees.

338. In addition, FinTRACA is currently receiving STRs only from banks related to a limited geographical area. None of the other non-bank financial institutions or DNFBPs has filed a suspicious transaction report.

339. Article 38 of the AML LD allows FinTRACA to disseminate financial information to the AGO for investigation or action when there are grounds to suspect money laundering and financing of terrorism reported by financial institutions. However, this power does not extend to financing of terrorism cases reported by DNFBPs.

340. Overall, and as mentioned under criterion 26.3, FinTRACA does not appear to have the appropriate level of access to administrative and law enforcement databases to properly undertake the analysis of STRs. It is conducting a preliminary tactical and operational analysis but does not conduct strategic analysis.

341. FinTRACA usually obtains additional information directly from banks. It has never requested information from other non bank financial institutions and DNFBPs as it has never received an STR from any DNFBPs.

342. As discussed above, FinTRACA disseminates money laundering related financial information to the AGO who forwarded them to LEAs for further investigation. Thus far, none of the reported cases has led to a prosecution. As of February 2011, FinTRACA has made 386 disseminations related to 1241 persons in response to requests from law enforcement agencies. These requests went to nine law enforcement agencies, namely the NDS-MCTF and MOI-MCTF, SIU, CNPA, MOF- Revenue Service, AGO, Interpol, HOO, NDS 74.

343. FinTRACA’s authority to share information as set forth in Article 26, paragraph 3 of the AML LD should be consistent with the general scope of the AML LD. It is not clear, however whether the scope of the AML LD allows for reactive dissemination since it is not expressly stipulated. In addition, by sharing the information with law enforcement agencies, FinTRACA places a high burden of work on its staff and distracts analysts from their responsibility to analyze STRs.

344. FinTRACA’s budget does not seem to be sufficient considering notably that 50 percent of FinTRACA’s operating expenses are covered by foreign donors. This fact raises questions about the sustainability of the FIU’s operations FIU and FinTRACA’s operational independence given the high probability that donor assistance will diminish, if not be entirely cut off, in the future. In addition, it seems that some decisions are signed by the Governor of DAB and not FinTRACA’s director.

345. FinTRACA did not publish periodically annual reports, typologies and trends of money laundering and terrorist financing. No periodic review of the AML/CFT system’s effectiveness has been conducted to date.

346. As discussed above, in-depth training on operational and strategic analysis is still needed for analyst.

2.5.2. Recommendations and Comments

347. The authorities are recommended to:

  • Amend the AML LD where necessary and obtain Parliamentary approval on an expedited basis to ensure that the establishment and functions of FinTRACA are grounded on a sound legal basis;

  • Provide FinTRACA with the power/authority to disseminate financial information to domestic authorities for investigation or action when there are grounds to suspect terrorist financing reported by non-banks FI and DNFBPs;

  • Ensure that FinTRACA raises awareness on the reporting requirement among all reporting entities and in particular provides money exchange dealers and DNFBPs with guidance regarding the manner of reporting, including the procedures to be followed when reporting;

  • Ensure that FinTRACA asks non-bank financial institutions and DNFBPs for additional information;

  • Ensure that FinTRACA (i) enhances the depth and quality of its STRs analysis, in particular by granting it access to the necessary financial, administrative and law enforcement information and enabling it to request on regular basis additional information from reporting entities; (ii) undertakes more in-depth tactical, operational and strategic analysis;

  • Ensure that FinTRACA establishes mechanisms for cooperation with regulators, supervisors, reporting entities and law enforcement authorities to optimize its analysis and establishes an information flow that remains confidential while enhancing FinTRACA’s analysis capacity;

  • Enhance the coordination between FinTRACA and LEAs to whom it disseminates its reports so they can investigate and send the evidence to the AGO;

  • Enhance FinTRACA’s independence by securing its independent budget that takes into account its increasing financial needs. Also, provide FinTRACA with adequate funding and staff to enable it to perform its functions effectively;

  • Ensure that FinTRACA periodically reviews the effectiveness of the system to combat money laundering and terrorist financing;

  • Ensure that FinTRACA publishes annual reports, typologies and trends of money laundering and terrorist financing;

  • Ensure that FinTRACA provides additional specialized and practical in-depth training to its employees. This training should cover, for example, predicate offenses to money laundering, analysis and investigation techniques and familiarization with money laundering and terrorist financing techniques, and other areas relevant to the execution of the FIU’s functions;

  • Due to its limited resources (funding and staff), FinTRACA should allocate most of its budget and staff to the execution of its core functions.

2.5.3. Compliance with Recommendation 26

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2.6. Law enforcement, prosecution and other competent authorities—the framework for the investigation and prosecution of offenses, and for confiscation and freezing (R.27, & 28)

2.6.1. Description and Analysis

Legal Framework

348. Article 134 of the Constitution stipulates that “discovery of crimes is the duty of the police and investigation and prosecution are conducted by the Attorney’s Office in accordance with the provisions of the law. The Attorney’s Office is part the Executive branch, and is independent in its performances. The structure, authority, and activities of the Attorney’s Office are regulated by law. Discovery and investigation of crimes related to the armed forces are regulated by a special law.”

349. Police Law no. 862 of 2005; Counter Narcotics Law of 2005; Customs Law 2009 Presidential decree no. 153 of 1366 on crimes against internal and external Security.

Designation of Authorities ML/FT Investigations (c. 27.1):

350. Some law enforcement agencies like the ANP were established before the issuance of the AML and CFT LDs and others were newly created in an attempt to reinforce the investigation in the predicated crimes, money laundering and terrorist financing. New agencies are the Major Crimes Task Forces (MCTF), SIU and IIU that were established within the Ministry of Interior (MOI), the National Directorate of Security (NDS), the Anti-Corruption Unit of the AGO. Most of these agencies were set up with the assistance of foreign donor countries.

351. The MOI and the Attorney General’s Office (AGO) are the primary financial enforcement and investigative authorities. The NDS and the Afghanistan Customs Department (ACD) at the MOF also have powers to investigate crimes.

352. The Afghan National Police (AFP) has two divisions responsible for AML/CFT, namely the Criminal Investigation Department (CID) in charge of investigating money laundering and the Counter Terrorism Unit (CTU) in charge of investigating terrorist financing cases.

353. The Sensitive Investigation Unit (SIU) which operates under the supervision of the deputy office for Counter Narcotics at the MOI is an intelligence unit involved in investigating drugs smuggling and related money laundering. There is no specific decree that establishes the unit. It was created based on Article 134 of the Afghan Constitution. It does not have an independent budget. It has been mainly funded and its staff trained by the US Drug Enforcement Administration. In total, the SIU has investigated 23 money laundering cases related to proceeds of drugs, and, in the course of these investigations, requested financial information from FinTRACA. The SIU is also present at the KIA to control smuggling.

354. The Intelligence and Investigation Unit (IIU) which operates under the supervision of the deputy office for Counter Narcotics at the MOI does not have investigative power but conducts undercover operations in drug trafficking, corruption, money laundering and terrorist financing cases. It has no independent budget and is funded by the UK SOCA.

355. The MCTF currently has two branches, one embedded within the MoI and the other within the NDS. The MCFT at the MOI under the supervision of the deputy office for Counter Narcotics was involved in several money laundering and terrorist financing and predicate crimes investigations. Also, the ACD has powers to investigate cases of smuggling.

356. The NDS is also competent in investigating major crimes and money laundering and terrorist financing cases.

357. As mentioned above, these agencies have the power to investigate money laundering and terrorist financing. However, there is no mechanism to coordinate the various agencies’ work to ensure effective implementation of AML/CFT measures to counter the very serious money laundering and terrorist financing threats in Afghanistan. This impedes the development and implementation of coordinated policies to systematically prevent, investigate and prosecute money laundering and terrorist financing as well as freeze and seize launderers and terrorist’s assets, monitor cash couriers, protect alternative remittance systems from abuse and to ensure that NPOs are not misused for terrorist financing. Coordination and cooperation between law enforcement agencies is undertaken for some high-profile cases. However where the predicate offenses span the mandate of more than one agency, it is unclear how issues of overlapping jurisdictions will be resolved for day to day operations.

Ability to Postpone / Waive Arrest of Suspects or Seizure of Property (c. 27.2):

358. While the authority to postpone or waive the arrest of suspected persons is not expressly found in laws or other texts, law enforcement and prosecutorial authorities do have recourse to these measures in practice. Decisions to arrest or seize, or to do both, are issued based on Article 45 of the AML LD. According to the authorities, they are subject to tactical considerations and can be postponed to enable further investigations or to avoid interfering with the prosecution of a crime.

359. According to Article 45, paragraph 3 of the AML LD, “the authority may, by substantiated ruling issued at the request of the […] judicial authority competent to investigate the predicate and money laundering offences and carrying out such operation, delay the freezing or seizure of the money, or any other funds and property or advantage, until the inquiries have been completed and, if necessary, order specific measures for the safe keeping thereof.” The law enforcement agencies mentioned that they often use this technique in drug trafficking cases. However, it does not appear that they use it for money laundering and terrorist financing cases as well.

Additional Element—Ability to Use Special Investigative Techniques (c. 27.3):

360. According to Article 44 of the AML LD, for the purpose of obtaining evidence of the predicate offense and evidence of offenses provided for under the LD, the judicial authorities may order for a specific period: (i) the monitoring of bank accounts and the like; (ii) access to computer systems, networks and servers; (iii) The placing under surveillance or tapping of telephone lines, facsimile machines, or electronic transmission or communication facilities; (iv) The audio or video recording of acts and behavior or conversations. The judicial authorities may also order the seizure of, or obtaining of information about, notarial and private deeds, or of bank, financial and commercial records. However, these operations are only possible only when there are “strong grounds for suspecting that such accounts, telephone lines, computer systems and networks or documents are or may be used by persons suspected of participating in” money laundering or a predicate offense.

361. Pursuant to Article 45 of the AML LD “(1) no punishment may be imposed on competent judicial authority who, for the sole purpose of obtaining evidence relating to offenses referred to in the AML LD, perform acts which might be construed as elements constituting any of the money laundering offenses; (2) The authorization of the competent judicial authority should be obtained prior to any such operation. A detailed report must be transmitted to the relevant authority upon completion of the operation; and (3) the authority may, by substantiated ruling issued at the request of the competent judicial authority competent to investigate the predicate and money laundering offenses] carrying out such operation, delay the freezing or seizure of the money, or any other funds and property or advantage, until the inquiries have been completed and, if necessary, order specific measures for the safe keeping thereof. “According to this text, these powers are limited to judicial authorities and do not extend to other LEAs.

362. While such techniques have not been used to date in the investigation of money laundering or terrorist financing, they have been used to investigate the predicate offenses (in particular, drug trafficking and smuggling).

363. The AML LD mentions wire tapping as one of the measures that may be ordered by the courts for the purpose of obtaining evidence on the money laundering offense or its predicates (without restriction) (Article 44). The validity of information obtained by wire tapping, however, is unclear: Judges of the Supreme Court met during the assessment considered that the information collected through wire tapping constituted “strong evidence” in a trial for terrorism, terrorist financing or drug-related offense, but “weak evidence” in cases of alleged corruption. Moreover, the authorities mentioned that a high level official suspected of having accepted bribes was arrested on the basis of recorded telephone conversations, and that the charges against him were subsequently dropped on the grounds that Afghan law “prohibits” wiretap evidence in corruption cases.

Additional Element—Use of Special Investigative Techniques for ML/FT Techniques (c. 27.4):

364. The MCTF, the SIU and the NDS, which are the competent authorities in investigating and collecting information related to money laundering and terrorist financing offenses, reported that they make regular use of special investigative techniques. No statistics are kept on the use of these techniques for combating money laundering, terrorist financing and the underlying predicate offenses.

Additional Element—Specialized Investigation Groups & Conducting Multi-National Cooperative Investigations (c. 27.5):

365. To date, authorities have not considered putting in place specialized investigation groups for conducting multi-national cooperative financial investigations.

366. On the national level, the cooperation between the MCTF, SIU, IIU and NDS takes place at the deputies’ minister of interior level meetings thus ensuring in some major cases co-operation and information sharing among law enforcement and other competent authorities.

Additional Elements—Review of ML & FT Trends by Law Enforcement Authorities (c. 27.6):

367. Money laundering and terrorist financing methods, techniques and trends are not reviewed by law enforcement authorities on a regular, interagency basis. No analysis or studies have been conducted or disseminated.

Ability to Compel Production of and Searches for Documents and Information (c. 28.1):

368. Article 16 to19 of the Police Law states that in normal cases, the police may resort to body search of a person if: (1) that person is arrested and held in custody; (2) there is evidence proving that he/she possessed items to be confiscated; (3) he/she fails, or does not want, to present identifying documents; (4) there is evidence proving that he/she possesses items that will pose a danger, or whose possession is illegal; (5) the police is uncertain about the identity of the stopped person; or (6) provided for by the law in other cases. The body search of a woman must be performed by a policewoman or a female who is assigned to the police.

369. No additional provisions grant LEAs with the power to compel production, search premises and seize and obtain necessary documents for the financial investigation from FIs and other businesses or persons were found in the relevant laws.

370. In practice, LEAs rely on FinTRACA’s access to financial information to identify suspected assets. They made 386 requests for information to FinTRACA related to 1241 persons. These requests came from nine Law Enforcement Agencies, namely the NDS-MCTF and MOI-MCTF, SIU, CNPA, MOF- Revenue Service, AGO, ANP, HOO, NDS. The AGO do not conduct financial investigation frequently.

Power to Take Witnesses’ Statement (c. 28.2):

371. The AGO has the power to summon witnesses, hear their testimony, and discuss with them all matters related to the alleged crime when this is beneficial for the investigation. Article 37 of the Interim Criminal Procedure Code is applicable to all investigations and claims related to money laundering as well as to the underlying predicate offenses and all related procedures.

Statistics (R.32)

372. Several agencies informed the assessment team that they conducted few money laundering and/or financing or terrorism investigations. However, no consolidated statistics were provided regarding the number of money laundering and terrorist financing cases investigated by different LEAs.

Adequacy of resources – LEA (R 30)

Funding

373. LEAs operating expenses are mostly covered my external donors. This fact raises questions about the sustainability of their operations and independence given the high probability that donor assistance will diminish, if not be entirely cut off, in the future.

Training

374. The different LEAs have received various types of training both in and out of the country: FinTRACA conducted trainings for the AGO, judges and the CNPA; the World Bank gave a three-phase course to some of the law enforcement agencies on money laundering and terrorist financing methods; the US Department of Treasury conducted a one week training focused on financial investigative techniques for LEAs and for judges; and the UK Government trained the AGO.

375. The level of training of LEAs’ officers, including prosecutors and judges, and their ability to deal with complex cases is still not sufficient. They need to receive in-depth money laundering and financing of terrorism training i.e. on the scope of predicate offenses, money laundering and terrorist financing trends and typologies, techniques to investigate and prosecute these offenses and techniques for tracing property that is the proceeds of crime or is linked to finance terrorism.

Analysis of Effectiveness

376. Several agencies were established to create a new framework to fight against the main asset generating crimes and money laundering. They include the Major MCTF, SIU and IIU that were established within the Ministry of Interior, the NDS, and the Anti-Corruption Unit of the AGO. Several LEAs were set up with the assistance of foreign donor countries, most of which still ensure a presence for training purposes.

377. A challenge that the authorities face throughout the various phases of law enforcement action (investigation, prosecution and trial) is the lack of clarity in criminal procedure matters and in the type of evidence that is necessary to secure a conviction. Procedural elements are spread out in various texts, not all of which were provided to the assessment team (see under recommendations 1 and 2 for more detail), and, as indicated in the case of wire tapping above, seem to be given different interpretations from one case to another.

378. Overall, the criminal process seems both cumbersome and slow, particularly at the level of the AGO. While this may be explained in part by the lack of clarity in criminal procedure, other factors may play a role, such as the lack of sufficient expertise in criminal financial matters (despite the provision of training), and the lack of coordination between the various authorities that are in charge of investigating money laundering and terrorist financing cases.

379. Additionally and as mentioned under Recommendation 26 (criterion 26.5 and analysis of effectiveness), none of the reported cases led to prosecution due to the lack of understanding between FinTRACA and the AGO. The level of evidence required by the AGO to start a judicial investigation is not clear to FinTRACA and LEAs. The AGO forwarded the cases to other law enforcement agencies for further collection of evidence.

380. At the time of the assessment, money laundering had been investigated in some instances, rarely prosecuted, and had not been referred to the courts. Again, there may be several reasons for this, notably the following:

  • Lack of coordination between newly established authorities mentioned above (i.e. NCTF, NDS) and absence of coordinated policies to fight money laundering and the financing of terrorism;

  • While the AML LD allows for money laundering and terrorist financing convictions based on the laundering of property generated by any criminal activity, and does not require a conviction for the predicate crime, there seems to be little appreciation for the fact, in many instances, money laundering is conducted by the perpetrator of the predicate crime;

  • It appears that the LEAs concentrate their investigations solely on the predicate crime and do not follow its proceeds to examine potential money laundering activity;

  • Further, in discussions with the AGO and the Ministry of Interior, it became clear that LEAs are under the belief that money laundering cases can only be generated by STRs and not by separate law enforcement actions. In practice, however, experience has shown that most money laundering cases are developed through the vigorous investigation of the predicate crimes and by following the proceeds generated from those crimes; more importantly, money laundering crimes must be pro-actively investigated, using such techniques as undercover operations and the use of electronic surveillance;

  • Although all law enforcement entities have received training on money laundering typologies, there is a startling belief among the authorities that Afghanistan is not vulnerable to money laundering.

381. In conclusion, it appears that the investigatory framework of Afghanistan is not effective in the fight against money laundering and terrorist financing.

2.6.2. Recommendations and Comments

382. In order to comply fully with Recommendations 27 and 28, the authorities are recommended to:

  • Appoint and adequately resource dedicated financial investigators to deal with (i) asset based investigations allied to the predicate crimes within their jurisdiction – including terrorism; (ii) money laundering and or terrorist financing allied to the predicate crime;

  • Investigate money laundering and or terrorist financing as a standalone crime irrespective of whether the source of information emanates from the FinTRACA or any other source;

  • Provide AML/CFT training to all investigative agencies at senior level and in particular for all dedicated financial crime investigators;

  • Improve the LEAs’ understanding of ML and TF risks and develop a national strategy addressing such risks and deploy the staff accordingly;

  • Use more frequently special investigative techniques such as the controlled delivery to detect and investigate predicate crimes;

  • Although not specifically required under the standard, in order to avoid duplication of efforts by LEAs, enhance dialogue amongst the competent LEAs and increase the effectiveness of investigations into money laundering or terrorist financing cases. In addition, introduce the concept of ‘lead-agency’ of multi agency working on cross-cutting crimes relating to money laundering and/or terrorist financing issues that could greatly improve the overall effectiveness of the AML/CFT regime.

2.6.3. Compliance with Recommendations 27 & 28

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2.7. Cross-Border Declaration or Disclosure (SR.IX)

2.7.1. Description and Analysis

Legal Framework

383. Article 6 of the AML LD requires any person leaving or arriving in Afghanistan to declare an amount equivalent to Af 1,000,000 (approximately US$20,000) in cash or negotiable bearer instruments. The decree includes Customs personnel among the list of officers authorized to implement the section of the AML LD on cross-border declarations and disclosure; police officers and employees of the Financial Intelligence Unit are also listed among the authorized officers. According to the legislative decree, a failure to declare is punishable by a fine equivalent to the amount being carried.

384. Customs derives its authority at the border from the Customs Law of 2005, enacted pursuant to Article 42 of the Afghan Constitution. This law focuses exclusively on the movement of goods across borders and does not make direct reference to the transportation of currency or negotiable bearer instruments.

Mechanisms to Monitor Cross-border Physical Transportation of Currency (c. IX.1):

385. Article 6 paragraph 1 of the AML LD stipulates that any person bringing in or taking out an amount equivalent to or exceeding Af 1,000,000 (around US$20,000) in cash or bearer negotiable instruments must report the fact through a written declaration to the proper authorities. The decree defines bearer negotiable instrument as a “writing representing a promise to pay money, (including bills of exchange, promissory notes or certificates of deposit) which may be payable to the bearer.” The decree does not include travelers’ checks, incomplete instruments that are signed but omit the payee’s name, and negotiable instruments in a form that would allow the title to pass upon delivery.

386. The currency and negotiable bearer instruments (CNBIR) disclosure form must be filled out in the event that a person is carrying over the prescribed amount in currency or bearer negotiable instruments, has made a false declaration, or is suspected of money laundering or financing terrorism. The CNBIR form in its original is comprised of three copies, one of which remains with the person declaring the currency, another copy retained is by Customs and is then sent to FinTRACA on a monthly basis. Customs official at International Airport (KIA) accumulate regular disclosures over a period of a month and then send them on to FinTRACA. A third copy is kept with Customs at the airport. According to the Kabul KIA Customs Director, two more photocopies of the form are made and distributed to the NDS and Interpol, both of which are present at the border crossing at KIA.

387. Enforcement of the cross border currency declaration regime is limited to persons departing from KIA. The Customs authorities at KIA stressed that the outbound declaration regime is being applied to all departing passengers; however, other officials indicated that the requirement is not applied to “VIP passengers” departing from KIA. Furthermore, the Customs authorities are only screening passengers and not luggage, cargo or mail.

388. The declaration regime is not applied to arriving passengers at KIA, nor to persons entering or existing Afghanistan at any other official border crossing.

Request Information on Origin and Use of Currency (c. IX.2):

389. Customs and other authorized officers at the border, upon discovering a failure to declare or a false declaration, do not have clear authority to obtain further information on the origin and intended use of the funds and bearer instruments. The CNBIR Declaration form includes fields on the origin and intended use of funds and bearer instruments, however there is no provision in the decree that obliges the passenger to disclose this information.

390. Article 6 paragraph 1 of the AML LD, which, as mentioned above, obligates any person leaving or arriving in Afghanistan to complete a CNBIR form in the event that they are carrying over Af 1,000,000 in cash or bearer negotiable instruments and stipulates sanctions only when the person fails to make a declaration; the Article is silent on the application of sanctions in the event of a false declaration.

Restraint of Currency (c. IX.3):

391. Article 6 of the AML LD gives the “authorized officer” the power to stop or restrain currency or bearer negotiable instruments in the case of a false declaration or suspicion of money laundering or terrorist financing. The language of Article 6 maintains some ambiguities as to who precisely is authorized to conduct searches, in some cases mentioning not only the “authorized officer,” but also an “authorized officer, and any person assisting such an officer.” Without elaborating further as to who or which agency would supply the assisting officer. These ambiguities could in part be leading to the confusion with respect to implementation of the declaration requirement at the KIA border crossings. Additionally, there are no provisions, which indicate a period of time for which an authorized officers can restrain currency or a bearer negotiable instrument for the purpose of determining whether or not evidence of money laundering or terrorist financing may be uncovered.

392. The assessment team learned that in practice, Customs authorities with the assistance of NDS and police officers present at the airport restrain the currency and arrest the carrier in the event of a false declaration, suspicion or due to a lack of proper documentation allowing for the transportation of currency out of Afghanistan. The individual and the seized currency are handed over to the police then to the AGO after completing a CNBIR form with Customs.

393. KIA Customs authorities stressed that to legally transport currency or bearer negotiable instruments in excess of Af 1,000,000, an authorization letter must be obtained from the Central Bank. According to them, this letter serves as a validation of that fact that the origin of the funds being transported is licit. However, no provision of Afghan law requires a courier of currency to obtain an authorization letter from the Central Bank. Moreover, according to FinTRACA, the DAB had never issued such an authorizing letter and has no intention of pursuing an authority to do so.

Retention of Information of Currency and Identification Data by Authorities when appropriate (c. IX.4):

394. CNBIR forms are retained by Customs, the FIU, the person making the declaration, NDS and Interpol in the event that the amount carried exceeds the prescribed threshold, a false declaration was made, and when there is a suspicion of money laundering or terrorist financing.

Access to Information by FIU (c. IX.5):

395. According to Article 6, paragraph 7 of the AML LD, the FIU receives hard copies of all CNBIRs from Customs authorities located at KIA on a monthly basis. The FIU shared with the assessment team physical copies of the CNBIR reports received during the course of 2010 from Customs officers at KIA. According to the FIU Director, 95 percent of all CNBIRs collected at KIA are for disclosure of cash exceeding the legally prescribed limit. Four Kabul-based MSPs are serving as the primary couriers of currency out of KIA and the agents of those MSPs are the individuals filling the vast majority of CNBIR at KIA. The decree stipulates that the FIU should receive CNBIRs within 5 days of a seizure being made by authorities at the border. In practice, the assessment team learned that the presence of an official from the FIU at KIA facilitates its direct involvement at the time that Customs makes a seizure of currency and thus ensures the FIU’s receipt of a copy of the declaration.

Domestic Cooperation between Customs, Immigration, and Related Authorities (c. IX.6):

396. Despite the presence of a multitude of law enforcement authorities at KIA, there is no clear indication either in the AML LD or in practice that this facilitates adequate cooperation and information sharing between all the relevant authorities. For instance, Article 6, paragraph 2 lists three distinct ‘authorized officers’, while Article 6 paragraph 6 makes reference to an “authorized officer, and any person assisting such an officer.” The array of Afghan government agencies at KIA are assisted by a security firm, which has the primary responsibility for screening all persons coming into the airport, and foreign government mentors, who are providing assistance geared towards increasing the technical expertise and capacity of the Afghan authorities.

397. Based on the information provided, the assessment team concluded that Customs authorities at KIA are sharing information with the FIU in a timely manner, as prescribed by the AML LD. Customs also appears to have a working relationship with other law enforcement agencies present at the border, involving them in case of a false or suspicious CNBIR and the detention of a person transporting currency. According to KIA Customs authorities, a copy of a CNBIR is provided to the FIU, NDS, and Interpol, all of which are present at KIA.

398. The information sharing channel between Customs and the FIU was abruptly shut down in late 2009 when an MOU between the Ministry of Finance and DAB was dissolved. According to the Customs and the FIU, the MOU between the two agencies was in place in order to facilitate information sharing on cross-border currency declarations and bearer negotiable instruments at KIA. The MOU also clarified responsibility of the FIU and Customs at the KIA border crossing, where the presence of numerous authorities creates confusion and fragmentation in the implementation of the legal regime. According to Customs, the MOU expired in late 2009 and therefore had to be renegotiated. However, the authorities at the FIU stated that the MOU was cancelled by the MOF due to a disagreement over which agency holds the responsibility for the collection of CNBIRs and retention of currency in the event of a false declaration at KIA. The dissolution of the MOU precluded Customs from sending copies of CNBIRs to the FIU for the month-long period while the MOU was being renegotiated. A new MOU came into force in early 2010, according to both the FIU and Customs.

399. Given the need for the operational independence of the FIU from the Central Bank, an MOU between the DAB and MOF governing the activities of the intelligence unit raises concerns as it may potentially afford the DAB operational control over FinTRACA. The assessment team has requested a copy of the original and current MOU, but has not received dated and signed copies of the documents.

International Cooperation between Competent Authorities relating to Cross-border Physical Transportation of Currency (c. IX.7):

400. The Customs authorities at KIA stressed that they were not responsible for coordinating international cooperation and stated that their understanding was that Interpol, which is also present at KIA and receives a copy of CNBIRs, handles international requests. Authorities could not comment on whether or not any such requests for cooperation had been received or issued by Afghan authorities or the nature of cooperation with Customs authorities in jurisdiction such as the United Arab Emirates, Pakistan and Iran.

401. FinTRACA engages in international cooperation through the Egmont Group of FIUs. The assessment team is not aware of any requests for international cooperation based on a CNBIR.

Sanctions for Making False Declarations/Disclosures (applying c. 17.1-17.4 in R.17, c. IX.8):

402. A failure to declare currency or bearer negotiable instruments in the amount equal to or exceeding Af 1,000,000 (around US$20,000) upon entry or departure from Afghanistan is punishable by a fine equal to the value of the currency or bearer negotiable instrument being transported. The AML LD does not explicitly make reference to sanctions in the event of a false declaration. The existing sanctions regime on cross-border declarations does not appear to be effective, dissuasive and proportionate.

403. Neither Customs authorities and nor the FIU were not able to provide statistics or relay anecdotally any incidents when this statute of the AML LD has been applied. However, both the FIU and Customs stated that in practice, a false declaration or a failure to declare currency at KIA has resulted in the seizure of the currency and the arrest of the person carrying the funds. In one instances relayed to the assessment team by authorities, three outbound passengers were arrested for a failure to declare and the currency they were transporting was seized. At the outset of the investigation, the currency was moved to the DAB for safe-keeping and FinTRACA proceeded with an investigation based on the CNBIR completed at the airport. In the course of the investigation, it was discovered that the passengers had not paid taxes on the money they were transporting out of Afghanistan, which was apparently earned through legitimate business activities. After paying the MOF the back taxed on the US$1,000,000, the couriers and the currency were released.

Sanctions for Cross-border Physical Transportation of Currency for Purposes of ML or TF (applying c. 17.1-17.4 in R.17, c. IX.9):

404. Customs, as well as the FIU and police officers, have the authority under the AML LD to seize the currency or bearer negotiable instrument in the event that the funds are suspected of being tied to money laundering and financing of terrorism. In practice, Customs seizes the assets and arrests the carrier of the currency, reports the incident to the FIU and transfers the individual to NDS for further investigation. The assessment team does not have any evidence that the sanctions have ever been applied in accordance with the decree, nor that Afghan law enforcement has pursued an investigation into money laundering or terrorist financing in connection to assets seized at KIA.

Confiscation of Currency Related to ML/TF (applying c. 3.1-3.6 in R.3, c. IX.10):

405. Article 6 paragraph 6 of the AML LD authorizes the police, Customs and the FIU to seize currency or bearer negotiable instruments that are suspected to be tied to a “covered offense.” The report of such seizure should be reported to the FIU, which is supposed to analyze the case and disseminate it to the AGO for prosecution in case of suspicion of money laundering or terrorist financing.

Confiscation of Currency Pursuant to UNSCRs (applying c. III.1-III.10 in SR III, c. IX.11):

406. In the absence of officially established mechanisms for disseminating the UNSCRs lists to the relevant authorities, Customs authorities at KIA are not receiving this list and could not verify that in practice the names of travelers are checked against the various UN sanctions lists. Customs does not have explicitly stated legal authority to freeze the assets of UNSC-listed individuals. (See discussion in section 2.4 of the report for additional information on the legal framework and the implementation of SR III).

Notification of Foreign Agency of Unusual Movement of Precious Metal and Stones (c. IX.12):

407. Afghanistan does not appear to have a formal system in place for its Customs services to identify unusual cross-border movements of gold, precious metals or precious stones and to notify their counterparts in other countries of these movements. The assessment team was not able to determine whether Customs or other competent authorities have ever notified any country of such a movement or if they cooperate with foreign Customs agencies with a view toward establishing the source, destination, and the purpose of the movement of such items in order to take appropriate action.

Safeguards for Proper Use of Information (c. IX.13):

408. There do not appear to be any procedures in place safeguarding information with respect to cross-border currency declarations at KIA. In fact, quite the opposite appears to be the case in practice; as the Customs authorities at KIA indicated to the assessment team, the original CNBIR form is made of three carbon copies, one to be retained with Customs, one to be sent to the FIU and the third to be retained by the passenger. Apparently, upon completion of the form by the traveler, the form is photocopied in order to distribute it to the other law enforcement agencies present at KIA. This deviates from advisable practices; the carbon copies of the CNBIR should remain just with Customs, FinTRACA and the passenger. Upon analysis of the information recorded in the form, the corresponding report should be disseminated to law enforcement, in the event of evidence of money laundering or terrorist financing.

Training, Data Collection, Enforcement and Targeting Programs (c. IX.14):

409. No training specific to the implementation of cross-border currency declarations has been provided, with the exception of the training offered by FinTRACA on the proper method for filling out CNBIRs.

410. No official data collection appears to be taking place and enforcement is limited.

Additional Element—Implementation of SR.IX Best Practices (c. IX.16):

411. The authorities have not given consideration to the implementation of the measures set out in FATF International Best Practices Paper on Cross Border Transportation of Cash by Terrorists and other Criminals.

Additional Element—Computerization of Database and Accessible to Competent Authorities (c. IX.17):

412. Customs authorities maintain only paper records, but relayed to the assessment team that they have filled in a request for a computerized system to the Ministry of Finance.

Statistics (R.32)

413. Customs indicated that they do not maintain official statistics on currency movement and seizures at KIA. However, FinTRACA provided the assessment team with a spreadsheet detailing statistics on CNBIRs collected at KIA on a monthly basis, including the currency in which the cash was being transported for the period from January 2007 – December 2010. The spreadsheet provided by the authorities includes data on CNBIRs received in late 2009 and early 2010, purportedly the period during which the MOU between the MOF and DAB was not in force and Customs was not disseminating CNBIRs to FinTRACA.

Adequacy of Resources—Customs (R.30)

414. The Customs official from KIA stated that the MOF offers special training to Customs officers in operating the baggage scanning equipment at the airport. Additionally, out of approximately 110 staff in the Customs office at the airport,19 have received more advanced training and are considered ‘professionals’ in their field the Customs official was not able to specify what type of skill set distinguishes the regulatory staff and the professional staff at KIA. It was also not immediately apparent what the training entails nor how the officers are selected to receive this training. Additionally, Article 6 paragraph 4 of the AML LD stipulates that “a person shall not be searched except for a person of the same sex”; however, the assessment team did not receive any indication from the authorities that separate training on searches of female versus male passengers has been provided to Customs officials. Note that in practice, a separate screening facility for women entering KIA is set up and in use upon entry into the airport.

Analysis of effectiveness

415. The extremely limited implementation of the cross-border declaration system in Afghanistan is a severe impediment to the effectiveness of the regime. Afghanistan’s notoriously porous borders, the central government’s limited jurisdiction across the country and the nascent capacity of law enforcement exacerbate the challenges to implementation. The authorities were not able to tell the assessment team the definitive number of official border crossings in Afghanistan and stated clearly that CNBIR are only being filled out and collected for outbound passengers at Kabul International Airport.

416. The limited implementation of the regime at KIA is further hampered by the proliferation of government agencies at this border crossing. According to Customs authorities at KIA and other sources that spoke with the assessment team, there are upwards of 40 different agencies and departments present at KIA. While the AML LD clearly establishes three competent authorities (police, Customs, and the FIU), it does not make clear which agency is responsible for the implementation of each of the elements of the decree. The level of disorganization and disorientation is apparent in the dispute that ensued between Customs and FinTRACA that led to the abrogation of an MOU between MOF and DAB and the reported failure of Customs to transmit CNBIRs to the FIU during the period of the renegotiation of the MOU.

417. The lack of official statistics being collected at the only border where the declaration requirement is in place hampers the ability of the assessment team to determine the effectiveness of the regime at KIA. Authorities from a variety of law enforcement agencies operating at KIA were only able to relay limited anecdotal evidence of currency seizures. This lack of evidence demonstrating the implementation of the sanctions provisions within Article 6 of the AML LD, given the known risk factors such as the fact that Afghanistan is a largely cash-based economy and estimates of US$3-4 billion dollars in cash couriered out of KIA annually (see SRVI for further details), is just one of the factors leading the assessment team to conclude that the implementation of SRIX on outbound currency and bearer negotiable instruments at KIA is ineffective.

2.7.2. Recommendations and Comments

418. The implementation of SR IX is based on mechanisms that are inconsistent and incomplete. The implementation of SRIX does not appear to be effective at KIA. The authorities should take the necessary measures to enable them to comply with SR. IX. Furthermore, the validity of the AML LD is in question, undermining the entirety of the legal regime with respect to SRIX.

419. In order to comply fully with Special Recommendation IX, the authorities are in particular recommended to:

  • Amend the AML and CFT LDs where necessary and obtain Parliamentary approval on an expedited basis;

  • Ensure that, as the security across the country improves, the AML/CFT framework with respect to SRIX is implemented;

  • Implement cross-border currency declarations for inbound and outbound transportation of currency and bearer negotiable instruments and extend these requirements to outgoing travelers at the VIP section, incoming travelers, and shipment of currency through containerized cargo and mailing of currency or bearer negotiable instruments by a natural or legal person at all official border crossings in Afghanistan;

  • Clearly define the term “bearer negotiable instruments” to include monetary instruments in bearer form such as: travelers checks; negotiable instruments (including checks, promissory notes and money orders) that are either in bearer form, endorsed without restriction or made out to a fictitious payee, or otherwise in such a form that title can pass upon delivery; and incomplete instruments (including checks, promissory notes and money orders) signed, but with the payee’s name omitted;

  • Take legislative steps to ensure that Customs has the authority to collect and request further information from the carrier of currency or bearer negotiable instruments on the origin of the currency or bearer negotiable instruments and their intended use in cases of suspicion of money laundering or terrorist financing;

  • Provide Customs with the authority to stop or restrain cash or bearer negotiable instruments for a reasonable time in order to ascertain whether evidence of money laundering or terrorist financing may be found, where there is a suspicion of money laundering or terrorist financing; or where there is a false declaration;

  • Establish in law effective, proportionate and dissuasive sanctions for false cross-border currency declarations;

  • Establish in law effective, proportionate and dissuasive sanctions for the physical transportation of currency or bearer negotiable instruments that are related to money laundering or terrorist financing;

  • Clarify the responsibility of each agency operating at the border and specifically designate the authority that is responsible for the implementation of SRIX;

  • Ensure that the prescribed threshold for declaration does not exceed US$/EUR 15,000;

  • Ensure that customs seek closer cooperation with other neighboring countries, such as establishing mechanisms for regular information exchange on cash seizures and cross-border transportation reports;

  • Ensure that customs report unusual movements of precious metals and stones to the countries of origination or destination;

  • Introduce electronic record keeping of CNBIR declarations and implement strict safeguards to ensure proper use of information by the appropriate authorities;

  • Train more Customs officers.

2.7.3. Compliance with Special Recommendation IX

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3. PREVENTIVE MEASURES—FINANCIAL INSTITUTIONS

Scope and legal basis of the preventive measures

420. The Afghan legislative framework for financial institutions consists primarily of the 2004 AML Legislative decree (the “AML LD”), which includes preventive measures for all financial institutions in relation to both money laundering and terrorist financing, and the 2005 DAB Regulation on the responsibilities of financial institutions in the fight against money laundering and terrorist financing (the “AML/CFT RR”). The 2004 CFT Legislative decree (the CFT LD) also provides preventive measures for wire transfer.

421. Most of the financial activities listed under the standard are offered in Afghanistan. The main financial institutions in Afghanistan are banks and MSPs. Insurance companies do operate but, according to the authorities, do not offer life insurance or investment linked insurance products. The AML LD nevertheless specifically includes the “underwriting and placement of life insurance and other investment related insurances, including insurance undertakings ad insurance intermediaries (agents and brokers) in its listing of activities that financial institutions may conduct.” For this reason, the legal framework which will be applicable to insurance companies once they start offering life insurance and other investment related insurance is part of the write-up below. There is however no securities sector in Afghanistan.

422. The table below details the type of financial institution performing each financial activity in Afghanistan, the legal framework that regulates them, and the relevant AML/CFT supervisor.

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423. The AML LD and the Banking Law are considered primary legislation for the purposes of this assessment. The AML/CFT RR is considered as an enforceable mean, as it sets out some mandatory requirements with sanctions for non-compliance established under the AML LD and DAB Law and is issued by a competent authority.

Assessment of the effectiveness of the preventive measures

424. Pursuant to paragraph 25 of the FATF Handbook for countries and assessors,64 “during the on-site visit, examined countries should organize meetings with a range of government Ministries and agencies, as well as the private sector.” Accordingly, these visits should include “a representative sample of financial institutions. “

425. While meetings were organized with two relatively minor banks, repeated requests from the assessment team to meet with one or both of the two largest banks in Afghanistan were denied by the authorities.65 The purposes of these requests were to enable the team to assess the implementation of AML/CFT preventive measures by financial institutions, to form a better understanding of the Afghan banking sector, and, ultimately, to provide detailed recommendations to the authorities as to how to improve the overall effectiveness of their AML/CFT framework in the banking sector. As a result of the authorities’ refusal, however, the assessment team was not given the opportunity to assess fully the level of implementation of the existing preventive measures in the Afghan banking sector.

Customer Due Diligence and Record Keeping

3.1. Risk of money laundering or terrorist financing

426. No particular financial activity or profession has been exempted of applying AML/CFT measures on the basis that there is low or little risk of money laundering or terrorist financing.

427. Both the AML LD and the AML/CFT RR impose clear and direct obligations on financial institutions with respect to the prevention of money laundering and terrorist financing. The authorities have not yet conducted a systemic review or assessment of potential money laundering and terrorist financing risks affecting financial institutions that could serve as a basis for applying enhanced and/or reduced measures in the financial system. The existing AML/CFT legal and supervisory frameworks have therefore been developed without considering the levels of money laundering and/or terrorist financing risk. With the exception of business relationship with PEPs where financial institutions are required to have appropriate risk management systems to detect these customers, the AML LD does not provide for financial institutions to apply risk sensitive approaches to compliance with customer due diligence obligations.

428. Meetings with Afghan authorities and financial institutions’ representatives revealed that their understanding of money laundering and terrorist financing risks is limited. The account opening documentation of some financial institutions nevertheless includes risk-based elements in relation to PEPs and foreign jurisdictions. However, based on the interviews with some of the institutions met, these policies did not appear to be implemented effectively.

3.2. Customer due diligence, including enhanced or reduced measures (R.5 to 8)

3.2.1. Description and Analysis

Legal Framework

429. As mentioned above the main relevant texts are the AML LD, which applies to all financial institutions, the Banking Law, which applies exclusively to banks, and the AML/CFT RR, which apply to all financial institutions supervised by DAB.

430. Article 2.1.d AML LD covers all the financial activities listed in the FATF methodology’s glossary under the definition of financial institutions The scope of the AML/CFT RR is different and is related to a list of financial institutions defined in Article 1.1.2 This list includes commercial banks, branches and representative offices of foreign banks, MSPs, foreign exchange dealers, payment systems operators, security services providers, non-depository credit institution (finance companies, leasing companies, mortgage companies), microfinance depository institutions (credit unions and cooperative banks), microfinance non-depository institutions, insurance companies, and private pension plans, to the extent that these institutions are required to be licensed, permitted, regulated or supervised by DAB.

431. Institutions that are required to be licensed, permitted, regulated or supervised by DAB are banks (Article 84 of the DAB law), MSPs (Article 90 of the DAB law), foreign exchange dealers (Article 75 of the DAB law), securities service provider (Article 92 of the DAB law), and depository microfinance institutions (Article 2.2.3 of the Banking Law and Regulation on depository microfinance institutions). Consequently, because non-depository credit institutions (namely finance companies and leasing companies), microfinance non-depository institutions, insurance companies, and private pension plans are not currently licensed, permitted, regulated or supervised by DAB, they are not subject to the AML/CFT RR despite their listing in Article 1.1.2 mentioned above. Regulations are under preparation for mortgage companies and leasing companies by DAB.

Prohibition of Anonymous Accounts (c. 5.1):

432. Pursuant to Article 8 of the AML LD, financial institutions are prohibited to “keep anonymous accounts, or accounts in obviously fictitious names.” In addition, section 1.3.2. of the AML/CFT RR points out that “financial institutions shall not open anonymous or accounts with fictitious names.” While the AML/CFT RR would comply with c.5.1 for financial institutions regulated by DAB, the enforceability of its section 1.3.2 is subject to interpretation, as section 1.5.2. provides a list of violations of the AML/CFT RR leading to enforcement actions which does not cover the failure to implement the requirements of section 1.3.2. Pursuant to section 1.5.2., enforcement actions “are not limited to” the listed violations, however the enforceability of section 1.3.2 has never been tested. The AML LD imposes sanctions for non-compliance with its Article 8 but the reference to “obviously” fictitious names introduces an uncertainty, as the financial institutions should be able to determine through CDD if the account’s name is fictitious without having to assess if it is obviously fictitious or not.

433. Numbered accounts are not prohibited in Afghanistan but according to section 1.3.2. of the AML/CFT RR, “if the bank opens a numbered account, the identity of the client must be known to a sufficient number of staff to perform identification and subsequent monitoring of the accounts.” However, the enforceability of this requirement is also subject to uncertainty as it is not included in the violations listed in section 1.5.2. of the AML/CFT RR. There is no reference to numbered accounts in the AML LD, but the standard CDD requirements apply to all types of accounts, and require from financial institutions the same level of identification of customers, verification of their identity and availability of records for all accounts. The supervisory department at DAB has indicated that there are no numbered accounts held in the country.

When is CDD required (c. 5.2):

434. Pursuant to Article 9.1 of the AML LD, CDD is required in the following circumstances:

  • When carrying out transactions equal to or exceeding Af 1,000,000 (US$23,242);

  • In receipt of an electronic transfer that does not contain complete originator information;

  • When there is a suspicion of money laundering or financing of terrorism;

  • When the reporting entity has doubts about the veracity or adequacy of previously obtained customer identification data; or

  • When establishing business relationship with any person.

435. Article 1.4.3 of the AML/CFT RR specifically relates to occasional transactions: It states that financial institutions must not carry out occasional transactions in excess of Af 500,000 (US$11,621) on behalf of customers who refuse to identify themselves or refuse to disclose and document the source of their funds. The identification of customers who initiate occasional transactions in an amount between Af 500,000 and Af 1,000,000 (US$23,242) may rely on documentation and recording of name and address only. The identification of customers who initiate occasional transactions of Af 1,000,000 and above should include all the CDD measures required in the AML/CFT RR (in the same way as for account opening) with two exceptions: i) in the case of corporations, “the articles of association and board resolution are not required,” and ii) the financial institutions are encouraged, but not required, to verify the identification documents supplied.

436. The Af 1,000,000 threshold for CDD set out in the AML LD is too high as it equals to more than US$23,00066 while FATF designated threshold is US$15,000. In addition, the AML/CFT RR’s exceptions in the identification and verification of occasional customers that are legal persons are not in line with the standards.

Identification measures and verification sources (c. 5.3):

437. Articles 9.1, 9.2 and 9.3 of the AML LD require financial institutions to identify a natural person and verify his or her identity. The verification has to be done “by the presentation of an original national identity card or passport that is current and bears a photograph, a copy or record of which shall be retained by the reporting entity, or such other documentation as may be prescribed in regulations by Da Afghanistan Bank” (Article 9.2).

438. The verification requirements for natural persons are detailed in section 1.3.3. of the AML/CFT RR as follows: “the financial institution must attempt to verify the information submitted, and retain a copy of the identification document. In addition, the financial institution shall record the permanent address, telephone number (if any), approximate date of birth, place of birth, occupation, and name of employer (if applicable). The financial institution must make reasonable attempts to verify all of this information by means such as telephone calls, visits to the customer’s home or place of work, or by any other appropriate and effective means.”

439. The AML/CFT RR tries to take into account the Afghan context and refers to verification techniques applicable in the country such as telephone calls, visits to the customer’s home or place of work. But the AML/CFT RR also introduces subjective assessments (“must attempt to verify,” “reasonable attempts to verify”) which do not comply with the standard.

440. Articles 9.1, 9.2 and 9.3 of the AML LD require financial institutions to identify legal persons “by the production of its current certificate of registration, license, or articles of association, a copy or record of which shall be retained by the reporting entity, or such other documentation establishing that it has been lawfully registered and that it is actually in existence at the time of the Identification as prescribed in regulations by Da Afghanistan Bank.”

441. In addition to the identification documents required by the AML LD, the AML/CFT RR contains the following additional identification requirements for legal persons:

  • Corporations and partnership: Name of entity, principal place of business operations, mailing address, contact telephone and fax numbers, taxpayer identification number or other official number, the original or certified copy of the certificate of incorporation and articles of association;

  • Other legal persons: name of client, mailing address, contact telephone and fax numbers, official identification number, and a copy of the documentation confirming the legal existence;

  • Single proprietorships: If the proprietorship is not registered, the account must be opened in the name of the proprietor as an individual, with proper identification of the natural person.

The requirement to verify the identity of legal persons is included in section 1.3.3.b. of the AML/CFT RR but not in primary or secondary legislation in the AML LD.

Identification of Legal Persons or Other Arrangements (c. 5.4):

442. Pursuant to Article 9.4. of the AML LD, “[d]irectors, employees or agents acting or purporting to act on behalf of a customer shall provide appropriate evidence, including but not limited to a current power of attorney issued by a competent authority under which such person is acting as a representative, and also provide proof of identity, along with verification of identity of the natural person on whose behalf such agents acts or purports to act.” There is no requirement in the AML LD to verify that a person purporting to act on behalf of a natural person is so authorized.

443. Financial institutions regulated by the AML/CFT RR should, pursuant to section 1.3.3., identify those who have authority to open or operate an account.

444. Based on Article 1.3.3.a. of the AML/CFT RR, “in cases where an account is opened by one individual on behalf of another individual, the identification procedure must be performed on both.” This identification procedure suffers however from the limitations indicated in relation to c. 5.3.

445. Section 1.3.3. of the AML/CFT RR requires to obtain from corporations and partnerships, in addition to valid registration documents, the original or a certified copy of the certificate of incorporation and articles of association.

446. There are no requirements in relation to other legal persons, such as organizations, charities, clubs or associations.

Identification of Beneficial Owners (c. 5.5; 5.5.1):

447. The AML LD does not require identifying the beneficial owner for all customers, but only for customers that are legal persons.

448. Pursuant to Article 1.3.3. of the AML/CFT RR, in all cases, “if there is any doubt that the customer is not the beneficial owner of the funds, the financial institution is responsible for taking reasonable steps to identify the beneficial owner.” Article 1.3.3.b. 1 of the AML/CFT RR requires financial institutions to identify the owner of a corporation or a partnership, whether they are individuals or other legal persons. Accordingly there is no requirement to identify the ultimate beneficial owner, or to verify the identity of these persons. In relation to charities, clubs and associations, Article 1.3.3.b.2 only requires financial institutions to identify those exercising control or significant influence over the assets.

Identification of Beneficial Owners – Legal persons (c. 5.5.2):

449. Article 9.3 of the AML LD requires a legal person to provide documentation regarding its ownership structure. The obligation does not refer to the control structure and is the responsibility of the legal person, not the financial institution; the AML LD does not require the financial institutions to understand the ownership and control structure of the customer.

450. Article 9.3 of the AML LD also requires financial institutions to take reasonable measures to verify the “actual owners” of such legal person. There is however no definition of “actual owners” in the AML LD. In addition to the general provision indicated under c.5.1. to take reasonable steps to identify the beneficial owner in case of doubt, the AML/CFT RR requires the identification of the owners of a corporation or a partnership “whether they are individuals or other units.”67 In relation to charities, organizations, clubs and associations, Article 1.3.3.b.2 requires “the identification of those exercising control or significant influence over the unit’s assets.”

451. While enforceable, the AML/CFT RR does not constitute secondary legislation. Consequently there is no requirement in primary or secondary legislation to determine who is the person who exercises ultimate effective control over a legal person or arrangement.

Information on Purpose and Nature of Business Relationship (c. 5.6):

452. Article 1.3.3.b.1 of the AML/CFT RR requires financial institutions to obtain information on the nature and the purpose of the corporate customer’s business, but only in relation to corporations and partnership. In relation to other legal persons, financial institutions should obtain a description of the purpose and activity of the unit pursuant to Article 1.3.3.b.2 of the AML/CFT RR. However, the AML/CFT RR does not apply to the insurance sector and non-depository microfinance institutions.

453. There is no requirement to obtain information on the purpose and intended nature of the business relationship with natural persons.

Ongoing Due Diligence on Business Relationship (c. 5.7; 5.7.1 and 5.7.2):

454. The AML LD does not require financial institutions to conduct ongoing due diligence of the business relationship.

455. Financial institutions subject to the AML/CFT RR are required to monitor customer’s account activity, on a regular basis, reasonable schedule, to be able to establish patterns, the deviation from which may indicate suspicious activity (Article 1.3.5 of the AML/CFT RR). This element is not enforceable as it is not listed in section 1.5.2. among the provisions subject to possible enforcement actions. In addition, the AML/CFT RR lacks precision as it does not require financial institutions to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business and risk profile, and where necessary the source of the funds.

456. Financial institutions subject to the AML/CFT RR are also required AML/CFT RR to undertake regular reviews of their customer’s identification records (Article 1.3.4. of the AML/CFT RR). These reviews should take place whenever there is a material change in the business relationship between the customer and the financial institution or transactions begin to deviate from the unusual pattern. The obligation to update CDD records is limited to establishing patterns, while it should include a more systematic and proactive requirement to update existing records, particularly for higher risk categories of customers or business relationships.

Risk—Enhanced Due Diligence for Higher-Risk Customers (c. 5.8):

457. Except for PEPs, which are the object of Recommendation 6 below, financial institutions are not required to perform enhanced due diligence on higher risk categories of customers. There are no requirements regarding higher risk business relationships or transactions, such as non-resident customers or private banking.

Risk—Application of Simplified/Reduced CDD Measures (c. 5.9 to c.5.12):

458. The authorities do not require financial institutions to apply reduced or simplified measures where there are low risks of money laundering or terrorist financing.

Timing of Verification of Identity—General Rule (c. 5.13 – c.5.14):

459. The AML LD and the AML/CFT RR do not address the timing of verification and its completion. There is no specific requirement to verify the identity of the customer and beneficial owner before or during the course of establishing a business relationship or conducting transactions for occasional customers. The authorities consider that this is covered by the obligation to identify and verify the identity of their customers. But the practice of financial institutions met by the assessors is to complete the verification process following the establishment of the relationship, which indicates that the requirement is not clear enough.

Failure to Complete CDD before commencing the Business Relationship (c. 5.15):

460. Pursuant to Article 11 of the AML LD, if a reporting entity is unable to meet its identification obligations, or if any doubt remains as to the true identity of the customer or the beneficial owner, it must not open the account, commence or continue business relations or perform the transaction. In addition, the reporting entity must submit a suspicious transaction report. The requirement to submit an STR if the client is not properly identified is also mentioned in Article1.1.2.f.2 of the AML/CFT RR.

461. It has to be noted that Article 11 of the AML LD refers to the identification procedures, and not the verification procedures, although both are considered under Article 9 of the AML LD. In addition, it refers to the notion of “beneficial owner” which is not mentioned in relation to the identification procedures. Finally, the requirement goes beyond the standard as financial institutions are required to submit an STR, as opposed to being required to “consider making” an STR.

Failure to Complete CDD after commencing the Business Relationship (c. 5.16):

462. There is no requirement to terminate the business relationship and consider filing an STR where financial institutions have already commenced the business relationship and is unable to comply with CDD obligations.

Existing Customers—CDD Requirements (c. 5.17):

463. There is no specific requirement to apply CDD measures to existing customers on the basis of materiality and risk and to conduct due diligence on such existing relationships at appropriate times. However, this is captured by the requirements to conduct ongoing due diligence pursuant to Article1.3.4. of the AML/CFT RR.

Existing Anonymous-account Customers—CDD Requirements (c. 5.18):

464. Anonymous accounts and accounts in “obviously” fictitious names are prohibited. There is no requirement to perform CDD measures on holders of existing anonymous accounts or accounts in obviously fictitious names.

Analysis of effectiveness (R.5)

465. Overall, CDD requirements are not effectively implemented. While the disconnect between legal requirements and the local realities regarding identification is an explanation, it also relates to weak supervision which does not give the incentive to perform CDD when it is obviously possible.

466. While banks represent the largest share of the formal financial sector, meetings with the country’s largest banks have been denied by the authorities. Consequently, the assessment team was not given the opportunity to assess how effective the implementation of the CDD measures is across the banking sector. Moreover, due to the security situation, the preventive measures are not enforced across the country. In particular, a number of financial institutions such as foreign exchange dealers, money service providers and microfinance institutions are not licensed and not supervised in parts of the country. The situation is particularly acute in the Kandahar province, one of the top opium cultivating regions, where the hawaladar and foreign exchange sectors are very significant and totally unregulated. In general, banks use similar internal policies across the country, but the security situation still makes internal controls and supervision challenging. Given the above, it is very unlikely that CDD measures are implemented in these regions where the rule of law is not upheld.

467. Based on the interviews with financial institutions and DAB supervisors, the level of implementation of the CDD requirements appears to be very low. This can be explained by a number of reasons. A first reason could be the large disconnect between the legal requirements and financial institutions policies, on the one hand, and the local realities regarding identification on the other. A large number of the population is illiterate and does not have identification documents. The existing identification documents generally don’t contain the minimal identification elements required by the AML LD such as the full date of birth, a permanent address and photo ID, and, according to the authorities, can easily be forged. In addition, the information in the business register is not sufficient to satisfy the identification requirements (see the write up under Section 5.1 below for more details). A second reason is that the financial institutions’ internal anti-money laundering policies which were shared with the assessors have obviously not been thoroughly checked by the supervisor because they are often incomplete or in contradiction with the legal framework. Finally, a third reason could be the current weaknesses of the supervisory framework in terms of capacity, resources, strategy, and enforcement, prevents effective implementation of basic requirements. No sanctions have ever been pronounced for failure to comply with CDD obligations (see the write up under Section 3.10 below for more details). Furthermore the authorities had to recognize, during interviews with the assessment team, major CDD breaches in relation to the difficulties currently encountered by a major bank. This recognition, despite any sanctions having been pronounced in respect to these breaches, further reinforces the role of the weaknesses in supervision in the build-up of the crisis.

Scope of CDD requirements

468. The effectiveness of implementation of CDD measures depends on the type of business relationships, transactions, and activities. While the authorities and financial institutions indicated that there are no numbered accounts in Afghanistan, the internal AML policy of one of the banks met by the assessors mention procedures to follow in relation to “confidential numbered accounts.” In relation to occasional customers, one bank indicated to the assessors that it accepts walk-in customers even though its AML policy notes that “no business transaction will be conducted with walk-in customers.” Non-depository micro-finance institutions met by the assessors had no internal CDD measures in place, and there were no AML/CFT policies in place in insurance companies according to their regulator. In the absence of supervision, there is no basis to establish that the CDD requirements are being implemented by foreign exchange dealers.

CDD for natural persons

469. As mentioned above, there is a large disconnecting between the legal requirements and financial institutions policies, on the one hand, and the local realities, on the other, regarding identification of natural persons. A large number of the population does not have identification documents. A small number of customers use passports and the most common identification document is the tazkira which is estimated to be held by approximately 60% of the population.

470. The identity of the tazkira’s applicant is normally confirmed by the local registry of population. Many registers have been destroyed during the recent wars and conflicts in Afghanistan. For this reason, it is common practice for the village elders or local religious authorities, to give a testimony on behalf of the applicant, stating that the applicant is indeed from the family he claims to be from. If the applicant has living relatives, his father or uncle may also testify in person to the local district official that the applicant is a kin. Then it is sufficient that the name of the applicant’s relative is in the local register of population. After the identity of the applicant has been confirmed, the matter is referred to the provincial police. Older tazkiras do not contain a picture of their holder. More recent tazkiras do but a large number of tazkiras were issued when the holder was a child and there is no obligation to renew it during adulthood. The photographs are therefore of little help for identification purposes. Tazkiras have a number, but each local registers has its own serials, which means that different persons might have the same tazkira number issued by different provinces. There is no mention of the date of birth but an estimate of the age of the holder at the time of the application (e.g. age 15 in 2011). In addition, the authorities and private sector representatives met by the mission indicated that it is easy to buy a forged tazkira for less than US$50. Finally, in some border areas with Pakistan, tazkiras are not issued but there is instead a card without picture delivered by the Governor of the province.

471. Another issue is to obtain an address as there is generally no street name or house number. Verification of the address is made difficult by the absence of postal service, which prevents for example from confirming a customer’s address. In some cases banks’ staff goes to visit their customer in order to verify their address. But this does not seem to be common practice, and appears generally limited to lending activity.

472. Verification of the identification is difficult in the absence of a centralized database of tazkiras. Some financial institutions send verifications requests to the Ministry of Interior but generally don’t receive an answer. In addition, it appears from financial institutions’ policies that the introduction of customers by a third party or a financial institution’s staff member is considered to be equivalent to verification of identity.

473. Financial institutions met had commercial software in place to monitor if their new customers are included in international sanctions lists. The monitoring was generally done at the moment of account opening with no ongoing monitoring, or monitoring of existing customers. One institution met by the assessors indicated that it uses biometry (fingerprints) to identify customers. It was however not clear to what extent this identification process was being implemented.

474. In addition, some financial institutions’ internal policies are not in line with the AML LD. One policy requires “to make all reasonable efforts to determine the true identity of all customers,” while the AML LD requires to identify and verify all natural persons. On the same line, another financial institutions’ policy indicates that it is “not allowed to start a banking relationship until due diligence, appropriate and sufficient for the circumstances, has been carried out.”

CDD for legal persons and arrangements

475. The same disconnect between the legal requirements and the local realities are obvious in relation to the identification and verification of legal persons. The information available on the business licenses is limited to the address and name of the president and the vice-president of a company, without date of birth, or relation to shareholders or owners. Business registration is fragmented between different administrations (see section 4) and the information submitted by a legal person at the time of registration does not satisfy the CDD requirements. The investment agency has a website with information on the companies that it registered, but this information is very limited as it does even not include the name of the president and the vice-president, and is not regularly updated. Financial institutions met by the assessors have indicated that they sent requests for verification to AISA but that they generally don’t receive any answer. In addition, the verification process is limited to ensuring that the license submitted is not forged or expired, and, overall, there seems to be no willingness to understand the ownership of the legal person. The authorities indicated, in relation to the troubles experienced by the country’s main commercial bank, that they had discovered the existence of false and forged documents, which enabled the beneficial owners of assets to hide their true identity from the bank.

476. While the weaknesses in identification records are real and prevent the effective implementation of the CDD requirements across the customer base, they should certainly not affect high risk customers, particularly in relation to major money laundering threats. Indeed, it is conceivable that most of the ultimate beneficial owners of significant assets are travelling abroad and have passports. Consequently, the weaknesses in the business and civil records should not prevent financial institutions from taking measures to identify and verify the beneficial owner in these cases, and the supervisor from enforcing the requirements. The problem of identification of natural persons may be more acute in relation to threats of financing of terrorism or the domestic laundering of smaller proceeds.

Risk

477. While the authorities did not decide that financial institutions can apply reduced or simplified measures where there are low risks, or define higher risks situation other than PEPs, some financial institutions classify customers into risk categories. One of the banks met by the assessors indicated having approximately 30 percent of non-resident customers, but neither this bank nor the other bank met by the assessors considered this category as higher risk. Among other potential higher risk categories not considered by financial institutions is private banking, which appears to be very limited in Afghanistan. One of the banks met by the assessors considers as high net worth customers those with more than US$15,000 in assets, and counts less than 300 of them, but does not apply enhanced due diligence measures. Financial institutions met by the assessors do not have any fine tuned risk policies with focus on certain geographic/customer risks such as the poppy/heroin producing regions, arms trafficking routes or commercial activities subject to corruption. The internal policy of one institution refers to an outdated list of non-cooperative jurisdictions.

Timing of verification

478. While the legal framework is unclear on the timing of verification, internal AML policies indicate that the completion of the CDD process can take place after the establishment of the business relationship. In one bank it is for example possible to make a cash deposit followed by an international transfer without having completed the CDD process.

Failure to satisfactorily complete CDD

479. If a reporting entity is unable to meet its obligations with respect to the identification procedures, or has doubts as to the true identity of the customer or beneficial owner, it should normally refrain from opening the account, commencing or continuing business relations or performing the transaction. But some financial institutions met by the assessors consider that having sent a letter to the investment agency (AISA) regarding the verification of identity of legal persons, or to the Ministry of Interior regarding natural persons, is sufficient for them to proceed, even if no response is received.

Existing customers

480. While there is no specific requirement to apply CDD measures to existing customers, some internal policies of financial institutions contain elements in this regard. But based on the weaknesses in the effective implementation of CDD measures to new customers, it is unlikely that these elements for existing customers are implemented.

Foreign PEPs—Requirement to Identify (c. 6.1):

481. Pursuant to Article 13.a of the AML LD, financial institutions should, in addition to performing normal due diligence measures, have appropriate risk management systems to determine whether the customer is a politically exposed person (PEP).

482. A definition of PEP is given in Article 2 of the AML LD. It means any person who is or has been entrusted with a prominent public function in the Islamic Republic of Afghanistan or in other countries, for example, heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of state-owned entities, and important political party officials. This definition includes all family members of such persons, and close associates who have business or financial relationships with such persons.

483. While the definition of a PEP is quite comprehensive and goes beyond the minimum required by the standards as it includes domestic PEPs, the risk management systems do not apply to potential customers, or customers whose beneficial owner is a PEP.

Foreign PEPs—Risk Management (c. 6.2; 6.2.1):

484. According to Article 13.b of the AML LD, financial institutions are required to obtain senior management approval for establishing business relationships with PEPs. Article 1.4.1 of the AML/CFT RR indicates that the opening of accounts or the handling of occasional transactions from PEPs must be approved by the financial institution’s chief executive officer or general manager.

485. Where a customer has been accepted and the customer or beneficial owner is subsequently found to be, or subsequently becomes a PEP, there is no requirement to obtain senior management approval to continue the business relationship.

Foreign PEPs—Requirement to Determine Source of Wealth and Funds (c. 6.3):

486. Pursuant to Article 13.c of the AML LD, financial institutions should take reasonable measures to establish the source of wealth and source of funds of customers identified as PEPs.

487. Article 13.c of the AML LD does not include requirements related to beneficial owners identified as PEPs.

Foreign PEPs—Ongoing Monitoring (c. 6.4):

488. Based on Article 13.d of the AML LD, financial institutions which are in a business with a PEP should conduct enhanced ongoing monitoring of the business relationship.

Domestic PEPs—Requirements (Additional Element c. 6.5):

489. Article 2 of the AML LD extends the requirements to PEPs who hold prominent public functions in the Islamic Republic of Afghanistan.

Domestic PEPs—Ratification of the Merida Convention (Additional Element c. 6.6):

490. The 2003 United Nations Convention against Corruption has been signed by the President and ratified by the Senate and the Parliament of the Islamic Republic of Afghanistan in August 2008. It has been published in the official gazette. The HOO has been created by presidential decree in July 2008. The establishment of the HOO is in line with Article 6.1. of the United Nations Convention against Corruption, calling for the establishment of an oversight body to prevent corruption. The HOO is also responsible for communicating key UNCAC benchmarks among government institutions and ensuring compliance with these benchmarks.

Analysis of effectiveness (R.6)

491. Corruption is a major proceeds generating crime in Afghanistan (see section 1), however, the current requirements with respect to PEPs do not appear to be implemented in practice and the system is particularly ineffective in view of the existing threats.

492. The two banks met by the assessors considered that they have the relevant procedures in place. Their internal policies generally differ from the domestic legal framework. Some elements go beyond the AML LD and the AML/CFT RR and are closer to the FATF standards (such as the requirement to determine if the beneficial owner is a PEP), but others are more limited than the Afghan framework (some PEPs are considered having low risk accounts and consequently monitored only once a year). The FIU has requested financial institutions to send their list of PEPs. On this basis, the FIU is planning to consolidate a list of PEPs who hold accounts in Afghanistan and to send it back to financial institutions. It is worth mentioning that some financial institutions are owned or controlled by PEPs.

493. There are constitutional and legislative obligation for senior officials to declare assets to the High Office for Oversight and Anti-Corruption (HOO). Pursuant to Article 154 of the Afghan Constitution, asset disclosure is mandatory for the President, Vice-President, Ministers, the Attorney General and members of the Supreme Court. Article 12.2. of the law on combating corruption makes asset declaration mandatory for deputy ministers, directors, members of the national assembly, members of provincial and district councils, members of independent commissions and bodies, ambassadors, governors, judges, military and police officials, district administrators, prosecutors, high ranking officials, and employees of financial, accounting, audit and procurement departments of each government institution. According to the HOO, approximately 200 asset disclosures made to the HOO have then been published in a State-owned newspaper. These disclosures are handwritten and only available in hard copies, which makes them difficult to access and search by financial domestic financial institutions, not to mention foreign financial institutions.

494. The scope of persons subject to the mandatory asset disclosure mechanism is somewhat similar to the definition of PEPs, the major exception being that it does not cover important political party officials and all family members of PEPs, and close associates who have business or financial relationships with such persons. It should however be mentioned that no connection is made between the AML framework and the asset disclosure mechanism, other than by a request sent by the HOO to the FIU to verify the asset disclosures of a dozen ministers.

Cross-Border Correspondent Accounts and Similar Relationships—Introduction

495. According to section 1.4.2. of the AML/CFT RR, financial institutions must not open correspondent accounts at, or for other financial institutions that are unlicensed or otherwise unregistered or domiciled in countries that have been designated by the FATF as non-cooperative in the fight against money laundering and terrorist financing. Financial institutions are required to apply due diligence to determine whether their customer is another financial institution and, if so, to ensure that such correspondent customers are in compliance with applicable anti-money laundering laws and regulations prior to opening an account. On-going enhanced monitoring must be applied to correspondent customers.

Requirement to Obtain Information on Respondent Institution (c. 7.1):

496. While based on section 1.4.2. of the AML/CFT RR general CDD measures apply in relation to cross-border correspondent banking, there are no additional requirements to gather information about a respondent institution to understand the nature of the respondent’s business and to determine the reputation of the institution and the quality of supervision.

Assessment of AML/CFT Controls in Respondent Institution (c. 7.2):

497. Section 1.4.2. of the AML/CFT RR requires financial institutions to ensure that correspondent customers are in compliance with applicable anti-money laundering laws and regulations prior to opening an account, but it is vague and is not clearly enforceable as these requirements are not listed in section 1.5.2. among the provisions subject to possible enforcement actions.

498. Consequently, there are no specific and enforceable requirements to assess the respondent institution’s AML/CFT controls, and ascertain that they are adequate and effective.

Other requirements related to cross border correspondent relationships (c. 7.3-c.7.5):

499. There are no requirements to obtain approval from senior management before establishing new correspondent relationships and to document the respective AML/CFT responsibilities of each institution, nor to address situations where “payable-through accounts” are maintained.

Analysis of effectiveness (R.7)

500. According to DAB, Afghan banks do not hold accounts for foreign financial institutions but have accounts in financial institutions abroad. Based on information received from the Central Bank at the time of the onsite visit, Afghan banks had 104 correspondent accounts in 34 countries. Most of the correspondent accounts are located in Germany (27), followed by the USA (11), and the United Kingdom (8). There are also accounts in financial centers such as Dubai, Luxembourg, Switzerland, Bahrain, Hong-Kong, Singapore or the British Virgin Islands.

501. Afghan banks hold correspondent accounts in a number of countries which have been listed by the FATF as having strategic AML/CFT deficiencies. These include Iran, Pakistan, Tajikistan, Turkey and Indonesia. Three correspondent accounts are open for Afghanistan banks in Iran and two are open in other countries (Germany and the UAE) in banks with Iranian capital.

502. It is interesting to note that in the case of Afghanistan some hawaladars operate similar cross border correspondent relationships. This is particularly the case with the UAE, Pakistan and Iran along the following scheme: An Afghan licensed MSP operates for Afghan MSPs customers who want to settle their accounts with foreign MSPs or financial institutions. In the case of relations with Dubai, this Afghan MSP would physically transfer the cash of its customers to the UAE, and distribute it to respondent MSPs in Dubai. In addition to the absence of legal framework, assessors have noticed that even normal due diligence measures are not performed in relation to these cross-border correspondent MSPs relationships.

Misuse of New Technology for ML/TF (c. 8.1):

503. There are no specific requirements AML/CFT RR to have policies in place to prevent the misuse of technological developments in money laundering or terrorist financing schemes.

Risk of Non-Face-to-Face Business Relationships (c. 8.2 and 8.2.1):

504. There are no specific requirements AML/CFT RR to have policies in place to address risks associated with non face-to-face business relationships or transactions.

Analysis of effectiveness (R.8)

505. Afghanistan presents the interesting feature to combine both financial transactions characteristic of a cash-based economy (preponderance of MSPs and exchange dealers), with the most advanced forms of financial intermediation (mobile banking, internet banking, “web surfer card.”

506. All the main banks offer internet banking services on their websites. In some cases these services are limited to consulting accounts and printing out statements but most of the banks enable the customer to perform all type of transactions online including domestic and international transfers. Financial institutions met by the assessors indicated that non-residents, often Afghan citizens, operate their Afghan bank account from abroad thanks to the internet banking capabilities. The authorities did not conduct any study of the AML/CFT threats and vulnerabilities of the internet banking sector, and do not have a clear picture of its extent either.

507. Mobile banking is also developing. Some banks offer the possibility to make balance inquiries and see the last transactions through mobile phone. One telephone operator offers the possibility to transfer funds from one account to another using the mobile phone, using a MSP license. While started in 2008, and claiming hundred of thousand of accounts, the service currently appears limited to a few thousands of active accounts, mostly used for the payment of salaries which are generally quickly withdrawn in cash. This MSP has partnered with a commercial bank in order for the customers to be able to send funds to a bank account, and plans to partner with other banks.

508. Based on the information provided to the assessors the risks appear limited because of the limited scope of the activity both in number of active customers and of the amounts transferred. Nevertheless, the current CDD measures are not sufficient, especially if the service were to expand. The measures in place to identify and verify the customer are less comprehensive than the standard CDD measures, there are a number of intermediaries in the CDD process, and the supervisor has never conducted an inspection of this business.

509. Finally, one of the financial institutions met by the assessors is delivering web surfer cards to its customers which appear to be traceable and accordingly do not raise particular issues.

3.2.2. Recommendations and Comments

Recommendations 5, 6, 7 and 8

In order to comply fully with all four Recommendations, the authorities should:

  • Ensure that the legal basis for the AML framework is sound;

  • Ensure that, as security improves, the AML/CFT framework is progressively implemented in the whole country.

Recommendation 5

510. The weaknesses in the identification and verification of customers are a major vulnerability in Afghanistan. It is related to structural deficiencies in the civil and business registration of persons which should be urgently addressed. This said, both the authorities and the financial institutions should not take excuse of the context to be complacent towards large scale laundering processes where the ultimate beneficial owner is often a well identifiable passport holder. The introduction of enhanced CDD in relation to higher risk categories of customer, business relationships or transaction, as well as a risk-based approach in supervision, and the systematic closure of higher risk accounts in case of failure to satisfactorily complete CDD could support progress in effective CDD in the short term. In relation to lower risk natural persons, alternative methods such as biometric identification and verification, already experimented by some institutions, could be considered.

511. In order to comply fully with Recommendation 5, the authorities should:

  • Require in primary or secondary legislation financial institutions to undertake CDD measures when carrying out transactions above US$15,000;

  • Remove from the AML/CFT RR the inadequate exceptions in the identification and verification of occasional customers that are legal persons;

  • Review the AML/CFT RR to require verification of the identity of natural persons in all cases;

  • Require in primary or secondary legislation financial institutions to verify the identity of legal persons;

  • Require in primary or secondary legislation financial institutions to verify that a person purporting to act on behalf of a natural person is so authorized, and identify and verify the identity of that person;

  • Require financial institutions not supervised by DAB to verify the legal status of the legal person or legal arrangement;

  • Require in primary or secondary legislation financial institutions to determine whether a customer is acting on behalf of another person;

  • Require financial institutions to understand the ownership and control structure of corporate customers;

  • Require in primary or secondary legislation financial institutions to determine who are the persons who exercise ultimate effective control over a legal person or arrangement;

  • Require financial institutions to obtain information on the purpose and intended nature of the business relationship for natural person;

  • Require financial institutions not supervised by the DAB s. to obtain information on the purpose and intended nature of the business relationship with legal persons;

  • Require in primary or secondary legislation financial institutions to conduct ongoing due diligence of the business relationship;

  • Put in place detailed and enforceable regulations on ongoing due diligence;

  • Clarify current requirements to update of CDD records and ensure that they apply to all financial institutions;

  • Require financial institutions to perform enhanced due diligence for higher risk categories of customers, business relationships or transactions;

  • Require financial institutions to verify the identity of the customer and beneficial owner before or during the course of establishing a business relationship or conducting transactions for occasional customers;

  • Prohibit financial institutions to open an account, commence business relations or perform a transaction in case of failure to satisfactorily complete the verification of identity, and require them to consider making a suspicious transaction report;

  • Require financial institutions to perform CDD measures on holders of existing anonymous accounts.

In addition, in order to improve the implementation of the CDD measures, the authorities should consider:

  • Establishing a proper system of identification of natural persons and a comprehensive register of legal persons requiring information on the ultimate beneficial owner;

  • Developing and implementing a supervision strategy aiming at sanctioning financial institutions failing to implement existing CDD measures in cases where information is available and verifiable.

Recommendation 6

512. In order to comply fully with Recommendation 6, the authorities should:

  • Require financial institutions to put in place appropriate risk management systems to determine whether a potential customer or a beneficial owner is a PEP;

  • Require financial institutions to obtain senior management approval to continue the business relationship, where a customer has been accepted and the customer or beneficial owner is subsequently found to be, or subsequently becomes a PEP;

  • Require financial institutions to take reasonable measures to establish the source or wealth and the source of funds of beneficial owners identified as PEPs.

513. In addition, in light of the extreme threat of laundering of the proceeds of corruption, the system in place is particularly ineffective and the authorities did not implement simple mechanisms which could have increased the efficiency of preventive measures regarding PEPs. Accordingly, the authorities should consider:

  • Make assets disclosures available online both in Dari and in English to assist financial institutions inside and outside Afghanistan to determine if their customers are PEPs;

  • Create a list of PEPs to be sent to financial institutions, based on the list of civil service positions that are required to disclose assets according to the constitutions and the anti-corruption law. Such a list could also be used in the analytical work of FINTRACA.

Recommendation 7

The authorities should require financial institutions to:

  • Gather information about a respondent institution to understand the nature of the respondent’s business and to determine the reputation of the institution and the quality of supervision;

  • Assess their respondent institution’s AML/CFT controls, and ascertain that they are adequate and effective;

  • Ensure that senior management’s approval is obtained before establishing new correspondent relationships;

  • Document the respective AML/CFT responsibilities of each institution;

  • Take measures to address risks related to the maintenance of “payable -through accounts.”

Recommendation 8
  • Require financial institutions to have policies in place or take measures to prevent the misuse of technological developments in money laundering or terrorist financing schemes;

  • Require financial institutions to have policies and procedures in place to address any specific risks associated with non face-to-face business relationships or transactions.

3.2.3. Compliance with Recommendations 5 to 8

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3.3. Third Parties and Introduced Business (R.9)

3.3.1. Description and Analysis

Requirement to obtain CDD elements from Third Parties (c. 9.1-5):

514. There are no elements in the AML LD or AML/CFT RR pertaining to intermediaries or other third parties. The central bank indicated that there are no intermediaries or brokers currently acting in relation to the operations it supervises, but that no legal provision prohibits these activities.

515. The legal framework for the insurance sector refers to brokers in Article 3.1. of the Insurance Law dated January 18, 2009. Brokers are regulated in Article 57 of the “Insurance procedures to accompany the insurance law of the Islamic Republic of Afghanistan” of July 10, 2008, which is still in force according to the Ministry of Finance. A broker can represent several insurers and include legal and natural persons. He is licensed by the insurance department of the Ministry of Finance.

Analysis of effectiveness (R.9)

516. According to the authorities, there are no intermediaries or third parties operating in the financial sector including the money services business, other than in the insurance sector. The authorities recognized that in remote areas of the country, persons were acting as intermediaries but they do not consider this to take place on a commercial basis. This said, the reliance on intermediaries to perform elements of the CDD process is nevertheless mentioned in internal AML policies of financial institutions.

517. Based on information provided by the authorities, one insurance broker was licensed at the time of the assessment. The authorities indicated that brokers can sell products from both domestic and foreign insurance companies. An example was given of an Afghan insurance broker selling Iranian insurance products. The insurance supervisor did not provide information on the type of products that are sold by brokers, but were doubtful that it includes life insurance products.

3.3.2. Recommendations and Comments

518. While the reliance on intermediaries does not seem very developed yet, it is legally possible and used in practice, making the absence of any rules a significant source of vulnerability.

519. In order to comply fully with Recommendation 9, the authorities should:

  • Set out rules governing the reliance on intermediaries or other third parties to perform elements of the CDD process or to introduce business, ensuring notably; that the elements that may be performed by third parties are limited to those listed under criteria 5.3 to 5.6 of the methodology; that the information collected by the third parties may be immediately available to financial institutions; the financial institutions are required to satisfy themselves that the third parties are regulated and supervised; and that the ultimate responsibility for customer identification and verification remains with the financial institutions relying on the third party.

3.3.3. Compliance with Recommendation 9

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3.4. Financial Institution Secrecy or Confidentiality (R.4)

3.4.1. Description and Analysis

Legal Framework

520. Financial institutions’ secrecy and confidentiality obligations are determined by Article 29 of the Banking Law and Article 34 of the January 18, 2009 Insurance Law. Elements ensuring that financial institution secrecy laws do not inhibit the implementation of AML/CFT measures are notably found in the AML LD.

Inhibition of Implementation of FATF Recommendations (c. 4.1):

521. Article 29 of the Banking Law on secrecy obligations requires “present and past administrators and employees of a bank […] to keep secret, not to use for personal gain and not to permit to be examined by others unless required by law, any information that they obtained in the course of their services to the bank, except that such information may be disclosed to the officers, staff and agents of Da Afghanistan Bank, including the inspectors, auditors, conservators and experts appointed by Da Afghanistan Bank, and to such other persons by order of a court of competent jurisdiction. “

522. Pursuant to Article 34 of the Insurance Law, “Whenever the civil service worker revealed the secret documents or mysteries of insurance will come under the legal prosecution” (translation provided by the authorities).

523. Based on Article 7 of the AML LD, reporting entities, supervisory authorities and auditors should comply with the requirements of the AML LD “notwithstanding any obligation as to secrecy or other restriction on the disclosure of information imposed by any other law or otherwise.” Article 26 of the AML LD further requires any reporting entity to submit, without charge, any information, documentation and records to the FIU, for the purposes of exercising its functions as specified in the AML LD.

524. Article 39.3 of the AML LD gives broad powers to the FIU to “enter any business premises” in which “it believes, on reasonable grounds, that there are records relevant to ensuring compliance with Articles 4 to 45” of the AML LD. Pursuant to Article 39.4 of the AML LD, the FIU may transmit any information from or derived from such examination to the appropriate domestic or foreign law enforcement authorities, “if the Financial Intelligence Unit has reasonable grounds to suspect that the information is suspicious or is relevant to an investigation for non-compliance with [this] Law, a criminal offence, a money laundering offence or an offence of the terrorism of terrorism offence.”

525. Article 44 of the AML LD gives powers to the judicial authorities to access information that could be covered by secrecy, including notarial and private deeds, or bank, financial and commercial records (see section 2). However these powers are only available when there are “strong grounds for suspecting” that these documents are or may be used by persons suspected of participating in money laundering or one of its predicate offenses.

526. The reference to “strong grounds” in Article 44 of the AML LD might inhibit the implementation of the AML/CFT framework, in relation to investigations, prosecutions and mutual legal assistance. In addition, there are no provisions in the Afghan legal framework to enable the sharing of information between financial institutions in cases where it is required in the FATF standards, in relation to cross border correspondent relationships, intermediaries or third parties, and information on wire transfers.

Analysis of effectiveness (R.4)

527. The FIU, supervisors and law enforcement agencies did not express difficulties in implementing the AML/CFT framework due to financial secrecy. This said, law enforcement agencies do not often use their powers to request information from financial institutions, and it appears from discussions that the reference to “strong grounds” in Article 44 is indeed limiting their capacity to access relevant information.

3.4.2. Recommendations and Comments

528. In order to comply fully with Recommendation 4, the authorities are recommended to:

  • Ensure that the legal basis for the AML framework is sound and ensure that, as security improves, the AML/CFT framework is progressively implemented in the whole country;

  • Amend the wording of Article 44 of the AML LD in order to lower the current threshold of “strong grounds” that judicial authorities’ face to access information covered by financial secrecy;

  • Enable the sharing of information between financial institutions in cases where it is required in the FATF standards, in relation to cross border correspondent relationships, intermediaries or third parties, and information on wire transfers.

3.4.3. Compliance with Recommendation 4

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3.5. Record-keeping and wire transfer rules (R.10 & SR.VII)

3.5.1. Description and Analysis

Legal Framework

529. The provisions regarding record keeping can be found in Article 14 of the AML LD, Article 1.3.8 of the AML/CFT RR, and Article 39 of the Banking Law.

530. Requirements for wire transfers are specified in Article 29 of the CFT LD and, to some extent, Article 5 of the AML LD and Section 1.4.4 of the AML/CFT RR.

Record Keeping and Reconstruction of Transaction Records (c. 10.1 and 10.1.1):

531. According to Article 14.a of the AML LD, reporting entities should maintain, for at least five years, all necessary records on transactions, both domestic and international.

532. In addition, pursuant to Article 39 of the Banking Law, banks are required to keep on file for at least ten years the pertinent documents for each one of their transactions, namely:

  • the application and all contract documents pertaining to the transaction (including credit, guarantee and collateral agreements);

  • the financial records of the bank’s counter parties (including borrowers and guarantors), and any other documentary evidence on which the bank relied in approving the transaction;

  • a signed written record of the decision of the bank approving the transaction;

  • the account agreements with its customers; and

  • other documents as DAB may specify by regulation (No additional documents have been specified by DAB yet).

533. Pursuant to Article 1.3.8. of the AML/CFT RR, financial institutions are required to maintain account information and transactions records of clients at least five years for account information, upon the cancellation of the account, and at least five years for transaction records, upon the recording of the transaction. These records include “information about the account holder or initiator of transaction the amount deposited or withdrawn from the account, the date and time of the transaction, the source and destination of the funds, and the method of transmittal of funds withdrawal, etc.” These requirements are listed in Section 1.5.2. of the regulations among the provisions subject to possible enforcement actions.

534. While transactions’ record keeping requirements are comprehensive, the legal framework does not envisage the possibility for records to be maintained for more than five years if requested by a competent authority in specific cases and upon proper authority.

Record Keeping for Identification Data, Files and Correspondence (c. 10.2):

535. According to Article 14.b of the AML LD, reporting entities should keep records on the identification data obtained through the customer due diligence process “as required by article 9” for at least five years after the business relationship has ended.

536. Information required by Article 9 of the AML LD does not include business correspondence.

Availability of Records to Competent Authorities in a Timely Manner (c. 10.3):

537. According to Article 14.2. of the AML LD, the identification data and transaction records should be available to domestic officials who are legally authorized. This is the case for FINTRACA and the DAB supervisors (see above in relation to R.4). Judicial authorities are authorized to access financial information based on Article 44 of the AML LD, but only based on a court order, when there are “strong grounds for suspecting that these documents are or may be used by persons suspected of participating in predicate offences.” This reference to “strong grounds” constitutes a high threshold, which may inhibit access to identification data and transaction records by law enforcement authorities.

538. Pursuant to Article 1.3.8. of the AML/CFT RR, financial institutions with branches or sub-offices are required to establish and maintain a centralized database of information from their branches and sub-offices on the identity of customers, principals, beneficiaries, agents and beneficial owners, and on all large cash transactions and suspicious transactions. This requirement is susceptible to facilitate timely access to reports. However, it is not sufficient to by-pass the high threshold set out in the AML LD.

Analysis of effectiveness (R.10)

539. The FIU and law enforcement authorities did not express any difficulty in accessing information from financial institutions in a timely manner. Problems are more related to the limited information collected by financial institutions than the keeping of records.

Special Recommendations VII

540. In Afghanistan, funds transfers are conducted by banks and money service providers (MSPs). International money transfer companies such as Western Union operate through regulated banks and MSPs. MSPs typically use telephone, fax, e-mail, and some of the larger MSPS also have proprietary messaging system to communicate the funds transfer information.

541. Article 5 of the AML LD stipulates that “[a] financial institution and the money remittance service shall include accurate originator information and other related messages on electronic funds transfers and other forms of funds transfers and such information shall remain with the transfer.” This requirement does “not apply to an electronic funds transfer other than a money transfer effected from the use of a credit or debit card as means of payments that results from a transaction carried out using a credit or debit card, provided that the credit or debit card number is included in the information accompanying such a transfer” (emphasis added). Further, the wire transfer requirement does not apply to electronic funds transfers and settlements between financial institutions where the originator and beneficiary of the funds transfer are acting on their own behalf. The first exemption is completely the opposite of the exemption provided for in the SR VII of the FATF standards (i.e. the card-based electronic funds transfers) and goes beyond the standards. The second exemption however is in line with the standards.

542. On the other hand, the CFT LD and the AML/CFT RR apply to all cross-border and domestic wire transfers without any exemptions.

543. The AML LD also requires that any transfer to or from foreign countries of monies or securities involving a sum equal to or exceeding Af 1,000,000 (about US$22,000), or its equivalent in foreign currency must be conducted by or through an authorized financial institution or an authorized money transmission service. The authorized financial institutions and the authorized money transmission services are banks and licensed MSPs. The carrying of cash or monetary instruments of Af 1millionor above is not prohibited as such but must be reported in writing to the relevant authority at the border as per Article 6 of the AML LD.

Obtain Originator Information for Wire Transfers (applying c. 5.2 and 5.3 in R.5, c.VII.1):

544. Article 29 (1) of the CFT LD specifically provides that “All cross-border wire transfers must be accompanied by precise information on the person ordering the transfer, particularly his or her name, and as applicable, account number. In the absence of an account number, a unique reference number shall accompany the transfer.” This article nevertheless fails to require the originator’s address (or a national identity number, customer identification number, or date and place of birth) which is called for under SR VII.

545. Pursuant to Article 29 (3) of the CFT LD, the methods for implementing Article 29 (1) of the same LD are to be established by regulation of DAB. The AML/CFT RR issued by DAB states that “[a]ll cross-border wire transfers must be accompanied by accurate information on the individual or unit initiating the transfer, including name, passport number or national identity card number, and account number […]. In the absence of an account number, a unique reference number shall accompany the transfer.” The requirement for the address is substituted with a requirement for the national identity number.

546. The requirements on wire transfers apply to all transaction regardless of the amounts. In addition, Section 1.4.3. (occasional transactions) of the AML/CFT RR further requires the sender to provide documentation on the source of the funds and record name and address if the cross-border wire transfer exceeds Af 1,000,000 (about US$22,000). See section on “When the CDD is required” (c. 5.2 for further detail).

547. Neither the CFT LD nor the AML LD specifically requires verification of the identity of the originator. Wire transfers are not subject to customer identification and verification requirements with the exception of incoming wire transfers without full originator information and wire transfers that falls under the category of occasional transactions which are set at Af 1,000,000 (about US$22,000) or above. Consequently, verification of the originator is not required unless the transaction is above Af 1,000,000. This threshold is substantially above the standards which is set at US$/EUR 1,000.

548. Further, the Section 1.4.3. (occasional transactions) of the AML/CFT RR requires financial institutions not to carry out occasional transactions in excess of Af 500,000 (US$10,000) on behalf of customers who refuse to identify themselves or refuse to disclose and document the source of their funds.

Inclusion of Originator Information in Cross-Border Wire Transfers (c. VII.2):

549. As stated above, financial institutions including money remittance service providers are required to include the full and accurate originator information for all the cross-border wire transfers regardless of the amount. There is no separate procedure for batch transfers.

Inclusion of Originator Information in Domestic Wire Transfers (c. VII.3):

550. Article 29 of the CFT LD and Section 1.4.4 of the AML/CFT RR both state that in principle, all domestic wire transfers must be accompanied by the full and accurate originator information. However, in certain circumstances, instead of full originator information, only an account number or a unique reference number can accompany the domestic transfer. Moreover, the CFT LD and the AML/CFT RR set out different sets of circumstances where this may apply AML/CFT RR. The CFT LD states that this situation applies if “all information concerning the person ordering the transfer can be made available to the financial institutions of the beneficiary and the competent authorities by other means”, whereas the AML/CFT RR states that this situation applies if the financial institution has or will have access to identifying information on the beneficiary. This slight discrepancy may be confusing for financial institutions and may lead to uncertainty as to under what circumstances the account number or a unique reference number can be included alone in lieu of full originator information. In addition, neither the CFT LD nor the AML LD and AML/CFT RR specify when full originator information should be made available to the beneficiary financial institution and to the appropriate authorities.

551. The AML LD does not differentiate the requirements on domestic and cross-border wire transfers.

Maintenance of Originator Information (“Travel Rule”) (c.VII.4):

552. While they do not specifically refer to the case of intermediary or beneficiary institution, all the relevant laws and regulations mentioned above require that accurate originator information and other related messages must accompany the wire transfers and remain with the transfer. All the transaction records are kept for five years as per Section 1.3.9. of the AML/CFT RR and Article 14 of the AML LD.

Risk-Based Procedures for Transfers Not Accompanied by Originator Information (c. VII.5):

553. The CFT LD and the AML/CFT RR do not contain all the provisions related to this requirement. Article 9 of the AML LD sets out the conditions under which identification and verification of the customers’ identity are required. One of the conditions is the receipt of an electronic transfer that does not contain complete originator information. However, this circumstance is not considered to be a factor in assessing whether a wire transfer or related transactions are suspicious and as appropriate to report to the FIU. There is no requirement for the beneficiary financial institution to consider restricting or even terminating its business relationship with financial institutions that fail to meet SR VII requirements.

Monitoring of Implementation (c. VII.6):

554. Section 1.5.1. of the AML/CFT RR specifies that the Financial Supervision Department (FSD) of DAB conducts compliance examination of financial institutions against the requirements set force in the AML/CFT RR. Rules and requirements on wire transfers are examined during the on-site examination as described below in the section of this report dealing with supervision of AML/CFT compliance. Consequently, the deficiencies noted with respect to the DAB supervision (for example, general lack of resources and lack of the examiners’ lack of expertise) also apply to its monitoring of the implementation of the wire transfer rules.

Application of Sanctions (c. VII.7: applying c.17.1–17.4):

555. The wire transfer rules in AML LD are enforceable; however, it is not clear whether the rules provided in the AML/CFT RR are fully enforceable because wire transfer rules are not listed in section 1.5.2. of the AML/CFT RR as one of the cases subject to enforcement actions. While the section 1.5.2. mentions that enforcement actions are not limited to those listed, it also refers to the applicability of the acts specified in the section.

556. Where applicable, the same sanctions apply to wire transfers as other AML/CFT obligations. For the type of available sanctions, please see the section 3.10. and subsection on “Sanctions.”

Additional elements—Elimination of thresholds (c. VII.8 and c. VII.9):

557. The requirements for wire transfers under the CF TLD, AML LD and the AML RR apply to all transfers regardless of the amount.

Analysis of Effectiveness

558. The discrepancies on the wire transfer rules noted above between the AML LD, CFT LD and AML/CFT RR create confusion: sometimes the AML/CFT RR satisfies the requirements of the standard which the AML LD or the CFT LD fail to meet the criteria in their entirety; or the AML LD meets certain aspects of the requirements, but the AML/CFT RR doesn’t.

559. As stated earlier, the current language in the AML LD exempts from the wire transfer rules all the electronic transfers which are not card based transfers. In other words, it applies only to card based transactions, which is exactly what the SR VII intended for exemption. This seems more of an error rather than an intentional policy decision. neither the CFT LD nor the AML/CFT RR have this exemption. Financial institutions met by the assessors interpret the AML LD as requiring to include originator information on all electronic transfer, except for debit or credit card transfers.

560. All the banks in Afghanistan use SWIFT for international transfers. Some of them do not offer wire transfer services to walk-in customers; they only transfer funds electronically for their account-based customers. The two banks met by the assessors indicated that they consider wire transfers as presenting a higher risk of money laundering or terrorist financing than other financial activities, and, in an effort to mitigate those risks, require more documentation than required under the decrees and regulations such as source of funds and income (even below the threshold required by the regulation) and supporting documents such as invoices. One bank mentioned that they do entertain walk-in customers; however, if this is the case, details and documentation required for account opening must be applied and the transfers must be approved by branch manager, MLRO, COO, or CEO. Small transfers (not in excess of US$10,000) to embassies/high commissions in payment of visas and renewal of passports/salary transfer/or other genuine purposes are exempted from those requirements, and a copy of the sender’s identification card or passport will suffice.

561. According to DAB officials, a wire transfer without complete originator information is rejected by the financial institutions and an STR is filed. One of the banks which the assessment team met has an internal policy which requires the Head of Departments to ensure the “authenticity” of all inward transfers (both domestic and cross-border). If a suspicion arises, then the funds must be placed in a separate account, advice from the MLRO or COO must be sought and an STR must be filed with DAB.

562. Some banks have an internal maximum threshold above which they refuse to conduct wire transfers. These thresholds are of Af 500,000 (about US$10,000) or equivalent for both inward and outward remittance per transaction and Af 1,250,000 (about US$25,000) or equivalent for remittance value over a single month. This seems to apply to walk-in remittance transfers although this is not clearly stated in the internal document.

563. Overall, detailed information is required from the originator, but, due mainly to the limited number of banks that the assessment team was enabled to meet and the weaknesses identified in supervision, it was not possible to establish that this requirement is properly implemented throughout the banking sector. In addition, the challenge posed by the availability and reliability of identification documents in Afghanistan mentioned in the write-up for Recommendation 5, also applies in the context of the implementation of the wire transfer requirements.

564. Pursuant to Section 2.4.2. of the MSP Regulation, MSPs must use an MSP ledger issued by DAB to record all their transactions. The MSP ledger requires detailed information about the sender (i.e. the customer) beyond full originator information. Similarly, detailed information is required about the beneficiary of the funds (see SR VI for more details).

565. MSPs mentioned that obtaining some of the required information is challenging.

566. No sanctions have been imposed for failure to comply with wire transfer requirements.

3.5.2. Recommendations and Comments

Recommendation 10

567. In order to comply fully with Recommendation 10, the authorities are recommended to:

  • Amend the AML LD where necessary and obtain Parliamentary approval on an expedited basis;

  • Ensure that, as security improves, the AML/CFT framework is progressively implemented in the whole country;

  • Introduce in primary or secondary legislation the possibility for a competent authority to request that records are maintained for more than five years, in specific cases and upon proper authority;

  • Require in primary or secondary legislation that financial institutions keep records of business correspondence;

  • Review the wording of Article 44 of the AML LD in order to lower the current threshold of “strong grounds” that judicial authorities’ face to access identification data and transaction records.

Special Recommendation VII

568. In order to comply fully with Special Recommendation VII, the authorities are recommended to:

  • Amend the AML LD where necessary and obtain Parliamentary approval on an expedited basis;

  • Harmonize the wire transfer rules in the AML LD, CFT LD, and AML/CFT RR;

  • Require verification of originator information for transactions above US$/EUR 1,000 or their equivalent in Af;

  • Clarify the rule on domestic wire transfer requirements in particular with respect to the conditions under which financial institutions can send only an account number or a unique identifier in lieu of full originator information;

  • Require financial institutions to adopt procedures that establish, on the basis of the risk of money laundering and terrorist financing, how to identify and deal with wires that are not accompanied by full originator information;

  • Add the maximum time frame of three days within which full originator information should be made available to the beneficiary financial institution and to appropriate authorities upon request;

  • Ensure that all elements of the wire transfer rules are enforceable (especially relating to the requirements in the AML/CFT RR);

  • Although this is not specifically required under the standard, to increase effectiveness, consider revising the MSP ledger to make it less onerous for smaller value transactions;

  • Ensure that wire transfer rules are implemented.

3.5.3. Compliance with Recommendation 10 and Special Recommendation VII

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3.6. Monitoring of Transactions and Relationships (R.11 and 21)

3.6.1. Description and Analysis

Legal Framework

569. Relevant provisions regarding monitoring of transactions are included in Article 12 of the AML LD.

Special Attention to Complex, Unusual Large Transactions (c. 11.1):

570. Pursuant to Article 12.1. of the AML LD, financial institutions are required to pay special attention to all complex, unusual large transactions, and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose.

Examination of Complex and Unusual Transactions (c. 11.2):

571. Article 12.1. also requires financial institutions to examine the background and purpose of such transactions and to set forth their findings in writing. In addition, Article 12.4 AML LD requires reporting entities to send an STR to the FIU for all transactions requiring special attention as per Article 12.1 AML LD. This obligation goes beyond the standards.

Record Keeping of Findings of Examination (c. 11.3):

572. Based on Article 12. 1 of the AML LD, these findings have to be available for competent authorities and auditors. Pursuant to Article 12.2. and 14 AML LD, findings have to be kept for 5 years.

Analysis of effectiveness (R.11)

573. The obligation to send an STR on all transactions requiring special attention appears counter-productive because, by imposing an automatic reporting, it does not encourage financial institutions to have a better understanding of these transactions. Gathering and maintain background information regarding unusual transactions is however important for CDD purposes and does not need to be reported to the FIU if the transaction has a reasonable explanation and is not suspicion. Financial institutions met by the assessors did not appear to pay special attention to complex and unusual transactions let alone set forth their findings in writing.

Special Attention to Countries Not Sufficiently Applying FATF Recommendations (c. 21.1 & 21.1.1):

574. Pursuant to Article 12.3. AML LD, financial institutions are required to give special attention to business relationships and transactions with persons from countries which do not or insufficiently apply anti-money laundering and combating the financing of terrorism requirements equivalent to those contained in the AML LD.

575. It has to be noted that under Recommendation 21, special attention should be given to business relationships and transactions with persons from or in countries which do not or insufficiently apply the FATF recommendations which is a higher threshold than the equivalence with the AML LD.

Examinations of Transactions with no Apparent Economic or Visible Lawful Purpose from Countries Not Sufficiently Applying FATF Recommendations (c. 21.2):

576. There is no requirement to examine transactions with persons from or in countries which do not sufficiently applying the FATF recommendations when these transactions have no apparent or visible lawful purpose. Article 12.4. of the AML LD nevertheless requires financial institutions to report to the FIU an STR in cases where they perform transactions or have business relationships with persons from countries which do not or insufficiently apply AML/CFT requirements equivalent to the AML LD.

577. Ability to Apply Counter Measures with Regard to Countries Not Sufficiently Applying FATF Recommendations (c. 21.3):

578. The legal framework does not provide for the possibility to apply counter-measures in cases where a country continues not to apply or insufficiently applies the FATF Recommendations.

Analysis of effectiveness (R.21)

579. Overall, the current framework is not effective at requiring financial institutions to give special attention to transactions from countries which do not or insufficiently apply the FATF recommendations, which is a serious issue as three countries neighboring Afghanistan were under FATF monitoring at the time of the onsite visit.

580. Notwithstanding the requirement in Article 12.3. of the AML LD, financial institutions do not receive updated information on concerns about weaknesses in the AML/CFT systems of other countries from the FIU or the supervisor. No information has been circulated following the issuance by the FATF of lists of countries with strategic deficiencies regarding AML/CFT. Some financial institutions met by the authorities mentioned the name of countries which were indicated either by their mother company, or following trainings organized by the FIU. None of these countries was one the three countries neighboring Afghanistan under FATF monitoring at the time of the onsite visit (Iran, Pakistan and Turkmenistan). The requirement to report transactions with persons from or in countries which do not or insufficiently apply AML/CFT requirements equivalent to those of the AML LD, has not been followed yet by the financial institutions met by the mission. The FIU did not indicate what percentage of STRs it has received was filed on the basis of Article 12.3. of the AML LD.

581. In relation to Iran, on the one hand, one of the banks met by the assessors indicated that it was not able to use the correspondent account it has with an Iranian bank. On the other hand, the DAB supervisory department indicated that “there is no need” to give special attention to transactions with Iran. Two Afghan banks have correspondent accounts in Iranian banks, and two other banks have correspondent accounts in banks in third countries and with Iranian shareholders. At least two Afghan banks have Iranian shareholders. It should be reminded that since February 2009, the FATF urges all jurisdictions to apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism risks emanating from Iran. In particular, the FATF urged jurisdictions to protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices.

582. In relation to Pakistan, one hawaladar met by the assessors indicated that he transfers every year hundreds of millions of dollars e which he justified as cash smuggling from Pakistan to Dubai. He explained this transit through Afghanistan by the tough exchange control restrictions in Pakistan which were said easier to circumvent through the border between Pakistan and Afghanistan. Four Afghan banks have correspondent accounts in Pakistan.

583. Trade and financial flow with Turkmenistan are more limited than with Pakistan and Iran and no Afghan bank had correspondent accounts in this country at the time of the onsite assessment mission.

3.6.2. Recommendations and Comments

584. Due to its geographical proximity with countries with strategic deficiencies regarding AML/CFT, the current lack of action of the authorities is of particular concern.

585. The authorities should:

  • Amend the AML LD where necessary and obtain Parliamentary approval on an expedited basis;

  • Ensure that, as security improves, the AML/CFT framework is progressively implemented in the whole country;

  • Remove the obligation to report STRs on all transactions and business relationships subject to special attention as it appears counter-productive, discouraging a financial institution to better understand these transactions, the end-results being an STR in all cases;

  • Expand the requirement under Article 12.3. of the AML LD, to jurisdictions which do not or insufficiently apply the FATF recommendations;

  • Provide for the possibility to apply counter-measures in cases where a country continues not to apply or to apply insufficiently the FATF Recommendations.

3.6.3. Compliance with Recommendations 11 & 21

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3.7. Suspicious Transaction Reports and Other Reporting (R.13-14,19, 25 & SR.IV)

3.7.1. Description and Analysis

Legal Framework

586. The reporting requirements for financial institutions and DNFBPs are set in primarily in (i) the2004 AML LD; (ii) the AML/CFT RR; and (iii) the MSP Regulation.

Requirement to Make STRs on ML and TF to FIU (c. 13.1 & IV.1):

587. Article 16 of AML LD requires reporting entities (see section 1 for the list of reporting entities) to file a suspicious transaction report (STR) when they (a) suspect that any transaction or attempted transaction may be related to or derived from the commission of an offense; (b) suspect that funds are linked or related to, or are to be used for terrorism, terrorist acts or by terrorist organizations. STRs can be submitted to FinTRACA in a form and by any rapid means of communication as may be determined in regulations of DAB.

588. Reporting entities should also be required to report a suspicious transaction even if it became clear only after completion of the transaction that there were grounds for suspicion. After having submitted a STR, reporting entities must report without delay any additional information that might confirm or invalidate the suspicion.

589. Article 17 of the AML LD specifies the obligations of compliance officers or auditor if they suspect that (i) any transaction or attempted transaction may be related to or derived from the commission of an offense; or (ii) has information that it suspects are relevant to an act preparatory to an offence of the financing of terrorism or relevant to an investigation or prosecution of a person or persons for an offense, or may otherwise be of assistance in the enforcement of the AML LD.

590. In addition to Article 16 of the AML LD, part A, 1.1.2 F of the AML/CFT RR defines suspicous transaction as “a transaction, or attempted transaction, or contact of any kind between parties with the intent to facilitate a transaction, regardless of amount or means of payment or ultimate completion of transaction, where any of the following circumstances exist: 1) there is no underlying legal or trade obligation, purpose, or economic justification; 2) the client is not properly identified; 3) the amount involved is not commensurate with the business or financial capacity of the client; 4) taking into account all known circumstances, it may be perceived that the client’s transaction is structured in order to avoid being the subject of reporting requirements under law and regulations; 5) there are circumstances relating to the transaction which are observed to deviate from the profile of the client and./or the client’s past transactions with the financial institution; 6) the transaction appears to be in any way related to an unlawful activity or offense that is about to be, is being, or has been committed; or 7) it is a transaction that is similar or analogous to any of the foregoing.”

591. According to Article 12, paragraph of the AML LD, reporting entities should report to the FIU, as STRs, i) all complex, unusual large transactions, and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose; and ii) business relationships and transactions with persons from countries which do not or insufficiently apply AML/CFT requirements equivalent to those contained in the AML LD.

592. The AML/CFT RR also specify the acceptable mode of reporting:

  • “By courier: Reports may be delivered to the FIU during normal business hours or by special arrangement with the General Director. Courier must present documentation to prove that he represents the reporting organization indicated on the report. Reporting entities must ensure that delivered media are securely packaged and sealed to prevent tampering in-route;

  • Electronic (preferred). Reports may be submitted by secure electronic mail. For this option, the reporting entity must sign an Electronic Signature Agreement with the FIU and must abide by the terms of the Agreement. A template agreement is posted on the FinTRACA website.68 Reports that are not submitted in accordance with the terms of the Agreement will not be accepted.”

593. The MSP Regulation, No 2, issued by DAB in April 2006 (MSP Regulation) also specifies in its article 2.3.7 that MSPs should submit required reports on susipicous transactions to the FIU or other reporsitory of such reports as may designated by the laws of Afghanistan. No other repository were created or disignated to far.

594. Finally, it is worth mentionning that the list or predicate offenses required to be reported do not include all categories of offenses defined under Recommendation 1.

STRs Related to Terrorism and its Financing (c. 13.2):

595. As mentioned above, there is an obligation imposed by the AML LD to report suspicious transactions related or linked to terrorist financing. However, deficiencies in the financing of terrorism offense scope limit the reporting requirement: the collection of funds for terrorist individuals, terrorist organizations or for carrying out terrorist acts, for example, is not criminalized and is therefore not subject to reporting (for more details, please refer to SR.II). There was no indication provided to the assessors those STRs had been received specifically in relation to terrorist financing.

No Reporting Threshold for STRs (c. 13.3):

596. According to the AML LD, all suspicious transactions including attempted transactions should be reported if they may be related to or derived from the commission of an offense, regardless of the amount of the transaction.

Making of ML and TF STRs Regardless of Possible Involvement of Tax Matters (c. 13.4, c. IV.2):

597. There is no impediment to the reporting of suspicious transaction based on the fact that the transaction or attempted transaction may, among other things, involve tax matters. However, FinTRACA has never received reports that are related to tax matters.

Additional Element - Reporting of All Criminal Acts (c. 13.5):

598. As mentioned before, article 16 of the AML LD requires the reporting of any transaction or attempted transaction that may be related to or derived from the activities which have been criminalized under Afghan law.

Protection for Making STRs (c. 14.1):

599. Article 42 of AML LD stipulates that no proceedings for breach of banking or professional secrecy shall be instituted and no civil, administrative or criminal action may be brought or any professional sanction taken against any person who in good faith transmits information or submits reports in accordance with the provisions of the AML LD. Also, no civil, administrative or criminal action may be brought against any reporting entity or its directors or employees by reason of any material loss resulting from the freezing of a transaction by the FIU in case of seriousness or urgency of the case as provided for in article 30 of the AML LD.

Prohibition Against Tipping-Off (c. 14.2):

600. According to Article 48 para. 1(a) of the AML LD, a natural or legal person who intentionally discloses any information regarding a report required to be filled under the AML LD to the person or persons to whom the report relates or to any other person not entitled to such information should be punished like persons or corporate entities who commits the money laundering offense (Article 46 and 47).

Additional Element—Confidentiality of Reporting Staff (c. 14.3):

601. According to Article 38 of the AML LD, the identity of the reporting party shall not appear in the report disseminated by FinTRACA to the AGO unless (i) there are reasons to suspect that the organization or its employee committed the offense of money laundering or if the information is necessary in order to establish facts during criminal proceedings; and (ii) if the submission of this information is requested in writing by the prosecutor or the competent court.

Consideration of Reporting of Currency Transactions Above a Threshold (c.19.1):

602. According to article 15 of the AML LD “a reporting entity shall report to the Financial Intelligence Unit in such form and manner and within such period as may be prescribed in regulations by Da Afghanistan Bank any transaction in cash in an amount as may be so prescribed, by Da Afghanistan Bank, unless the recipient and the sender are financial institutions.”

603. Article 1.1.2.a. of the AML/CFT RR, which applies to banks and MSPs, defines large cash transaction as a transaction in which one party receives, pays, or otherwise transfers cash, bullion, other precious metals, or precious stones, or any other monetary instrument with a value equal to or exceeding Af 500,000 (around US$12,600). A large cash transaction also includes the completion of two or more such transactions by or on behalf of the same person during any two consecutive business days when the total value of the transactions is equal to or exceeds Af 500,000 (around US$12,600).

604. The Regulation specifies that LCTRs should be filed no earlier than the first business day of the month and no later than the fifth business day of the month following the month during which the transaction occurred. If no reportable transactions occurred during this period, then a “NIL” reports should be prepared.

605. These reports are to be submitted to FinTRACA in electronic format. LCTRs must comply with the specification published on the FlU’s website.69 According to the authorities, the specification was designed to facilitate direct extraction of reports from the reporting entity’s databases and to eliminate the possibility of formatting errors. For reporting entities that are not technically capable of direct extraction, a computer-based form is also supplied on the FinTRACA website. The form, once filled by the reporting entity, will generate reports that conform to the specification. Instructions for preparation of a “NIL” report are also posted on the website.

606. The MSP Regulation also specifies in its article 2.4.2. that every DAB licensee must submit reports to the Financial Supervision Department of DAB which monitors compliance with the reporting requirements and which will forward reports to the FinTRACA. The following reports must be submitted within 10 business days of the end of each financial month: a report on the number and aggregate volume of transmissions, where transmissions are broken down according to the following parameters: inbound and outbound; foreign and domestic; and currency of denomination of amounts transmitted; Exact and unaltered signed duplicate copies of each month’s transactions as provided in the official record books issued by DAB and bearing a number registered by DAB as having been issued to the licensee. No other means of duplication is allowed. When justified by specific business circumstances, licensees may propose to the DAB Financial Supervision Department and FinTRACA an alternative mode of reporting which, if accepted, may be used in lieu of the official record books.

607. In practice, the total number of LCTRs filed is as follows:

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608. The statistics provided by the authorities to the assessment included the names of the reporting entities, and showed that some banks started reporting later than others, and in an irregular manner.

Additional Element—Computerized Database for Currency Transactions Above a