US embassy cable - 04TEGUCIGALPA2816

UNCLAS SECTION 01 OF 05 TEGUCIGALPA 002816 
 
SIPDIS 
 
STATE for INL and WHA/CEN 
Justice for OIA and AFMLS 
Treasury for FinCEN 
 
E.O. 12958: N/A 
TAGS: KCRM, KTFN, KJUS, ECON, PGOV, PREL, HO 
SUBJECT: HONDURAS: 2004-2005 INCSR PART II, MONEY LAUNDERING 
AND FINANCIAL CRIMES. 
 
REF: State 254401 
 
1.  Post provides its submission for the 2004-2005 
International Narcotics Control Strategy Report (INCSR) Part 
II, Money Laundering And Financial Crimes. 
 
Introduction and General Questions 
 
Two years after passing a new law against money laundering, 
the government of Honduras has made considerable progress in 
implementing the law, establishing and training the entities 
responsible for the investigation of financial crimes, and 
improving cooperation among these entities.  In 2004, these 
efforts began to pay off, with 16 money laundering-related 
arrests, seizure of over $6 million worth of cash and goods, 
and the first five convictions for money laundering crimes 
in the country's history.  Sustained progress will depend 
upon increased commitment from the government of Honduras to 
prosecute financial crimes aggressively. 
 
Honduras is not an important regional or offshore financial 
center and is not considered to have a significant black 
market for smuggled goods (though there have been recent 
high-profile smuggling cases involving gasoline and other 
consumer goods).  Money laundering, however, does take place 
in Honduras, primarily through the banking sector but also 
through currency exchange houses and front companies as 
well.  The vulnerabilities of Honduras to money laundering 
stem primarily from significant trafficking of narcotics, 
especially cocaine, through the region, though smuggling of 
contraband may also generate funds that are laundered 
through the banking system.  Money laundering in Honduras 
derives from both domestic and foreign criminal activity, 
and the proceeds are controlled by local drug trafficking 
organizations and organized crime syndicates.  Honduras is 
not experiencing an increase in financial crimes such as 
bank fraud.  It is not a matter of government policy to 
encourage, facilitate or engage in laundering the proceeds 
from illegal drug transactions, from other serious crimes, 
or from terrorist financing.  However, corruption remains a 
serious problem, particularly within the judiciary and law 
enforcement sectors. 
 
Laws and Regulations to Prevent Money Laundering/Terrorist 
Financing 
 
Money laundering has been a criminal offense in Honduras 
since 1998, when the passage of Law. No. 27-98 criminalized 
the laundering of narcotics-related proceeds and introduced 
various record keeping and reporting requirements for 
financial institutions.  However, weaknesses in the law, 
including a narrow definition of money laundering, made it 
virtually impossible to successfully prosecute the crime. 
 
In 2002, Honduras passed Decree No. 45-2002, which greatly 
strengthened its legal framework and available investigative 
and prosecutorial tools to fight money laundering.  Under 
the new legislation, the definition of money laundering was 
expanded to include the transfer of assets that proceed 
directly or indirectly from trafficking of drugs, arms, 
human organs or people, auto theft, kidnapping, bank and 
other forms of financial fraud, and terrorism, as well as 
any sale or movement of assets that lacks economic 
justification.  The penalty for money laundering is a prison 
sentence of 15-20 years.  The law also requires all persons 
entering or leaving Honduras to declare, and if asked, 
present, money in cash and convertible securities ("titulos 
valores de convertibilidad inmediata") that they are 
carrying if the amount exceeds $10,000 or its equivalent. 
 
Decree No. 45-2002 also created a financial information 
unit, the Unidad de Informacion Financiera (UIF), within the 
Honduran National Banking and Insurance Commission. Banks 
and other financial institutions are required to report to 
the UIF any currency transactions over $10,000 in dollar 
denominated accounts or 200,000 lempiras (approximately 
$10,770) in local currency accounts. The law requires the 
UIF and reporting institutions to keep a registry of 
reported transactions for five years.  Banks are required to 
know the identity of all their clients and depositors, 
regardless of the amount of a client's deposits, and to keep 
adequate records of the information.  The law also includes 
banker negligence provisions that make individual bankers 
subject to two- to five-year prison terms if, by 
"carelessness, negligence, inexperience or non-observance of 
the law, they permit money to be laundered through their 
institutions."  All of the above requirements apply to all 
financial institutions that are regulated by the National 
Banking and Insurance Commission, which include state and 
private banks, savings and loan associations, bonded 
warehouses, stock markets, currency exchange houses, 
securities dealers, insurance companies, credit associations 
and casinos.  The law does not, however, extend to the 
activities of lawyers or accountants. 
 
Decree No. 45-2002 requires that a public prosecutor be 
assigned to the UIF. In practice, four prosecutors are 
assigned to the UIF, each on a part-time basis, with 
responsibility for specific cases divided among them 
depending on their expertise. The prosecutors, under urgent 
conditions and with special authorization, may subpoena data 
and information directly from financial institutions. Public 
prosecutors and police investigators are permitted to use 
electronic surveillance techniques to investigate money 
laundering. 
 
Under the Criminal Procedure Code, reporting individuals 
such as bank officials are protected by law with respect to 
their cooperation with law enforcement authorities. 
However, some have alleged that their personal security is 
put at risk if the information they report leads to the 
prosecution of money launderers.  Officials of the Public 
Ministry, the National Banking and Insurance Commission and 
the private-sector banking association AHIBA are looking 
into ways that testimony from bank officials could be 
treated differently in order to protect the identity of the 
bank officials. 
 
Until this year, there had been some ambiguity in Honduran 
law concerning the responsibility of banks to report 
information to the regulating authorities and the duty of 
banks to keep customer information confidential.  A new law 
passed in September 2004, the Financial System Law (Decree 
No. 129-2004) clarifies this ambiguity, explicitly stating 
that provision of information demanded by regulatory, 
judicial, or other legal authorities shall not be regarded 
as an improper divulgence of confidential information. 
 
There have been no changes or additions to the Honduran laws 
governing money laundering or terrorist financing during 
2004.  However, four financial sector strengthening laws 
were passed in September, including the Financial System Law 
mentioned above, and reforms of the National Banking and 
Insurance Commission and the Central Bank.  While these laws 
do not touch specifically on money laundering or terrorist 
financing, they improve the legal and operational capacity 
of the Honduran authorities to regulate the banking sector, 
and should therefore strengthen the authorities' ability to 
detect and counteract money laundering or terrorist 
financing.  While some banks and political figures objected 
to certain parts of these laws, on the whole the laws were 
developed through close consultation with representatives of 
the banking sector, which generally supports the changes for 
their positive impact on greater regulatory clarity and 
effectiveness. 
 
Prosecutions in 2004 
 
Prior to 2004, there had been no successful prosecutions of 
money laundering crimes in Honduras.  To date in 2004, 
however, the authorities have arrested 16 persons for money 
laundering crimes, issued six additional outstanding arrest 
warrants, and secured five convictions. 
 
In April 2004, two Guatemalan citizens were caught crossing 
the border between Guatemala and Honduras carrying $247,000 
in cash, suspected to be connected to narcotics trafficking 
activities.  The two men were brought to trial in June, and 
one was convicted and sentenced to 16 years in prison, while 
the other was found not guilty.  This was the first 
conviction of a money laundering offense since the 2002 law 
had been passed. 
 
In December 2002, the fishing vessel Capitan Ryan was seized 
while departing a Honduran port and found to be carrying 
$467,000 in cash, believed to be connected to drug 
trafficking.  The Hondurans on board the boat were arrested 
and, in June 2004, four of them were convicted of money 
laundering, while three others were found innocent and 
released.  All four who were convicted are currently serving 
terms of 19 years in prison.  The cash and other assets 
(including the boat) seized at the time of the arrest were 
ordered forfeited.  Another person connected to the same 
case was apprehended in Panama by Panamanian authorities; 
his case is still being processed in the Panamanian judicial 
system. 
 
In early 2004, a Honduran named Angela Platero was arrested 
and charged with running an illegal lottery scheme and 
laundering the proceeds.  Honduran authorities seized 
approximately $1.6 million in cash and assets in connection 
with this investigation.  The case was due to go to court in 
October 2004, however defense attorneys filed a motion 
claiming that the seizure was unconstitutional, which has 
been referred to an appellate court.  A denial of the motion 
is expected in early January 2005, in which case the case 
will proceed to trial in February. 
 
Measures to Prevent Terrorist Financing 
 
The government of Honduras has been supportive of 
counterterrorism efforts.  Decree No. 45-2002 states that an 
asset transfer related to terrorism is a crime; however, 
terrorist financing has not been identified as a crime 
itself.  The law does not explicitly grant the government 
the authority to freeze or seize terrorist assets; however, 
on separate authority, the National Banking and Insurance 
Commission has issued freeze orders promptly for the 
organizations and individuals named by the UN 1267 Sanctions 
Committee and those organizations and individuals on the 
list of Specially Designated Global Terrorists designated by 
the United States pursuant to Executive Order 13224 (on 
terrorist financing).  The Ministry of Foreign Affairs is 
responsible for instructing the Commission to issue freeze 
orders. The Commission directs Honduran financial 
institutions to search for, hold, and report on terrorist- 
linked accounts and transactions, which, if found, would be 
frozen. The Commission has reported that, to date, no 
accounts linked to the entities or individuals on the lists 
have been found in the Honduran financial system. 
 
While Honduras is a major recipient of flows of remittances 
(estimated at $1.1 billion in 2004), there has been no 
evidence linking these remittances to the financing of 
terrorism.  Remittances primarily flow from Hondurans living 
in the United States to their relatives in Honduras.  Most 
remittances are sent through wire transfer or bank services, 
with some cash probably being transported physically from 
the United States to Honduras.  There is no significant 
indigenous alternative remittance system such as hawala 
operating in Honduras, nor is there any evidence that 
charitable or non-profit entities in Honduras have been used 
as conduits for the financing of terrorism. 
 
Honduras signed the 1999 International Convention for the 
Suppression of the Financing of Terrorism on November 11, 
2001, and ratified the convention on March 25, 2003. 
 
Free Trade Zones 
 
Under Honduran legislation, companies may register for "free 
trade zone" status, and benefit from the associated tax 
benefits, regardless of their location in the country. 
Companies that wish to receive free trade zone status must 
register with the Office of Productive Sectors in the 
Ministry of Industry and Commerce.  As of December 2004, 
there are 337 companies, both Honduran and foreign, with 
free trade zone status operating in the country, mostly in 
the textile and apparel industry.  There is no indication 
that free trade zones are being used in trade-based money 
laundering schemes or by the financiers of terrorism. 
 
International Cooperation 
 
Honduras cooperates with U.S. investigations and requests 
for information pursuant to the 1988 UN Drug Convention. 
Honduras has signed memoranda of understanding to exchange 
information on money laundering investigations with Panama, 
El Salvador, Guatemala, Mexico, Peru, Colombia, and the 
Dominican Republic.  Honduras strives to comply with the 
Basel Committee's "Core Principles for Effective Banking 
Supervision," and the new Financial System Law (Decree No. 
129-2004) passed in September 2004 is designed to improve 
compliance with these international standards.  At the 
regional level, Honduras is a member of the Central American 
Council of Bank Superintendents, which meets periodically to 
exchange information. 
 
Honduras is a party to the 1988 UN Drug Convention, the UN 
Convention against Illicit Traffic in Narcotic Drugs and 
Psychotropic Substances, the UN International Convention 
against Transnational Organized Crime, and the UN 
International Convention for the Suppression of the 
Financing of Terrorism.  Honduras signed the OAS Inter- 
American Convention on Terrorism in June 2002, ratified the 
agreement on September 22, 2004, and became a party to the 
agreement when it deposited its instruments of ratification 
on November 23, 2004.  Honduras signed the UN Convention 
Against Corruption on May 17, 2004.  Honduras is a member of 
the Organization of American States Inter-American Drug 
Abuse Control Commission (OAS/CICAD) Group of Experts to 
Control Money Laundering and the Caribbean Financial Action 
Task Force (CFATF).  Currently Spain and Panama are 
sponsoring the Honduran UIF for membership in the Egmont 
Group of Financial Intelligence Units; that membership is 
expected to be voted upon in 2005. 
 
No specific written agreement exists between the United 
States and Honduras to establish a mechanism for exchanging 
adequate records in connection with investigations and 
proceedings relating to narcotics, terrorism, terrorist 
financing, and other crime investigations.  However, 
Honduras has cooperated, when requested, with appropriate 
law enforcement agencies of the U.S. government and other 
governments investigating financial crimes. 
 
Examples of cooperation between Honduran and U.S. 
authorities include the prosecution of the Capitan Ryan case 
described above, which was aided by support from the 
Department of Treasury's anti-money laundering technical 
assistance program, and by cooperation between the INL 
offices at Embassy Panama and Embassy Tegucigalpa: Embassy 
Panama provided funding travel so that Panamanian police and 
prosecutors could share critical evidence with Honduran 
authorities. 
 
Another example of inter-governmental cooperation concerns 
an ongoing investigation into the assets of drug trafficker 
Juan Ramon Matta Ballesteros, currently serving a prison 
term in the United States.  In June 2004, a tip from the 
Spanish authorities alerted the Honduran authorities that 
$550,000 was being transferred to a Honduran bank account in 
the name of Matta Ballesteros' wife.  The Honduran 
authorities seized this money, but lack direct evidence that 
the money is connected to illegal activities, since a legal 
case was never brought against Matta Ballesteros in 
Honduras.  Officials in the Honduran Public Ministry 
requested information from the U.S. authorities by means of 
an MLAT (Mutual Legal Assistance Treaty) to substantiate 
their claim that the money was derived from illegal 
activities.  The Office of International Affairs in the U.S. 
Attorney's Office in Washington agreed to give the Honduran 
authorities access to the historical case files, and two 
Honduran officials from the Public Ministry will travel to 
Washington in January 2005 to examine the files, with INL 
funds supporting the trip. 
 
Asset Forfeiture and Seizure Legislation 
 
Congress first enacted an asset seizure law in 1993 that 
subsequent Honduran Supreme Court rulings substantially 
weakened.  Decree No. 45-2002 strengthened the asset seizure 
provisions of the law, establishing an Office of Seized 
Assets (OABI) under the Public Ministry.  The law authorizes 
the Office of Seized Assets to guard and administer "all 
goods, products or instruments" of a crime, and states that 
money seized (or money raised from the auctioning of seized 
goods) should be transferred to the public entities that 
participated in the investigation and prosecution of the 
crime.  Under the Criminal Procedure Code, when goods or 
money are seized in any criminal investigation, a criminal 
charge must be submitted against the suspect within sixty 
days of the seizure.  If one is not submitted, the suspect 
has the right to demand the release of the seized assets. 
 
Decree No. 45-2002 is not entirely clear on the issue of 
whether a legitimate business can be seized if used to 
launder money which derives from criminal activities.  The 
Chief Prosecutor for Organized Crime maintains that the 
authorities do have this power, since once a "legitimate" 
business is used to launder criminal assets, it ceases to be 
"legitimate" and is subject to seizure proceedings. 
However, this authority is not explicitly granted in the 
law, and there has been no test case to date which would set 
an interpretation.  There are currently no new laws being 
considered regarding seizure or forfeiture of assets of 
criminal activity. 
 
The total value of assets seized in 2004 was $6.1 million, 
of which $4.1 million was in cash and $2.0 million was in 
goods.  This marks a significant increase over 2003 figures 
of $2 million in cash and $584,000 in goods, for a total 
value of seized assets of $2.6 million.  Most of these 
seized assets are alleged to have derived from crimes 
related to drug trafficking; none of the seized assets are 
suspected of being connected to terrorist activity.  The law 
allows for both civil and criminal forfeiture, and there are 
no significant legal loopholes that allow criminals to 
shield their assets. 
However, OABI has not established firm control over the 
asset seizure and forfeiture process.  Implementation of the 
existing law, and the process of equipping OABI to maintain 
control over seized assets and effectively dispose of them, 
has been slow and ineffective.  The implementing regulations 
governing OABI were not finalized and published until more 
than a year after the passage of the law.  Plans to build 
separate offices and a warehouse for this entity are still 
incomplete, resulting in seized assets currently being kept 
in various locations under dispersed authority.  Money 
seized is also kept in various accounts without clear 
records of control, or kept in cash as evidence.  Due to the 
absence of a clear chain of custody over seized cash, the 
Public Ministry on one occasion in 2004 used seized cash to 
pay certain employees' salaries, without the money's first 
having passed through a proper legal process for 
disposition. 
 
Similarly, assets seized, such as vehicles, property, and 
boats, are in many cases left unused, rather than being 
distributed for use by government agencies.  In one case in 
2004, a house seized in connection with a drug-trafficking 
investigation was nominally put under OABI's control, but 
was in fact left unguarded, and as a result was looted and 
severely damaged.  Cases such as this one have led some 
police agencies, which do not have the proper assets to 
conduct their operations, to use these assets, again without 
their first having passed through a legal process for their 
disposition. 
 
While these actions are contrary to proper procedures set 
forth in the law, OABI lacks the necessary autonomy or power 
to resist such actions, since OABI is itself under the 
Public Ministry.  Furthermore, there is currently no 
external or independent audit of OABI's activities to 
guarantee transparency and proper handling of seized assets. 
 
There is no evidence that traffickers, organized crime 
organizations, or terrorist organizations have taken 
retaliatory actions related to money laundering/terrorist 
financing investigations, government cooperation with the 
USG, or seizure/freezing of assets. 
 
Conclusion 
 
In 2004, the government of Honduras took positive steps to 
implement Decree No. 45-2002 by establishing and equipping 
the various government entities responsible for combating 
money laundering.  However, there are only limited resources 
available for training officials, most of whom lack 
experience in dealing with money laundering issues.  Further 
progress in implementing the new money laundering 
legislation will depend on the training and retention of 
personnel familiar with money laundering and financial 
crimes and improved ability and willingness of the Public 
Ministry to aggressively investigate and prosecute financial 
crimes.  The government of Honduras should continue to 
support the developing government entities responsible for 
combating money laundering and other financial crimes, and 
ensure that resources are available to strengthen its anti- 
money laundering regime.  The government should also 
criminalize terrorist financing, and should ensure full 
implementation and proper oversight of its asset forfeiture 
program. 
 
Palmer