MONEY LAUNDERING:
Costa Rica

SOURCE:
International Narcotics Control Strategy Report -2003
Released by the Bureau for International Narcotics and Law Enforcement Affairs
March 2004


Costa Rica remains vulnerable to money laundering and other financial crimes, due to the narcotics trafficking in the region. Costa Rica is a haven for Internet gaming companies. Despite 2002 reforms of the Costa Rican counternarcotics law to expand the scope of anti-money laundering regulations, the government’s licensing and supervision of the offshore sector and nonbank financial institutions remain inadequate.

Gambling is legal in Costa Rica, although the currency that is subject to Internet gaming operations may not be transferred to Costa Rica. Consequently, over 100 sports book companies operate in Costa Rica by paying administrative costs locally and accepting bets to accounts located outside of Costa Rica.

Low taxes and strong secrecy laws have created an offshore sector in Costa Rica that offers banking, corporate, and trust formation services. These foreign-domiciled “offshore” banks can only conduct transactions under a service contract with a domestic bank, and they do not engage directly in financial operations in Costa Rica. Instead, these banks receive or transfer funds in foreign currency, generally using correspondent accounts in other countries, thus avoiding most of the financial rules and laws of Costa Rica.

Currently, eight offshore banks maintain correspondent operations in Costa Rica, including three from the Bahamas, three from Panama, one from the Cayman Islands and one from Montserrat. In all cases save the Cayman Islands, the Government of Costa Rica (GOCR) has signed supervision agreements with its counterparts, permitting the review of correspondent banking operations. Costa Rican authorities admit that these agreements are restricted and prevent, for example, the review of current liabilities in the Bahamas.

The licensing procedure for foreign-domiciled banks remains inadequate. The Central Bank approves applications for foreign-domiciled banks to operate in Costa Rica by relying on a foreign jurisdiction’s certificate of good standing.

Foreign-domiciled banks are required only to provide monthly balance statements and year-end audits to the General Superintendent of the Financial System (SUGEF). In 2003, SUGEF reviewed the operations of all seven offshore banks in countries where a supervision agreement exists. However, SUGEF only has authority over the domestic activity of these foreign-domiciled banks. All other activity of the offshore banks is beyond SUGEF supervision.

Evidence of black market Colombian peso exchange through private banks in Costa Rica declined dramatically in 2003. These exchange schemes permitted the transfer of $225 million between April 2002 and December 2002 by Colombian international credit card holders and currency exchange houses who carried large sums of declared currency (often between $100,000 and $300,000) to Costa Rican banks.

The U.S. dollars were transferred to U.S. banks and then to Colombian banks, where account holders profit from arbitrage exchange rates. The flow of money to Costa Rica dropped to approximately $40 million in 2003. Since August, the flow of money via couriers has slowed to a trickle. It is not yet known if the capital flow has shifted to other countries or if different transaction schemes are being used in Costa Rica.

In January 2002, Costa Rica expanded the scope of Law 7786 via Law 8204 to criminalize the laundering of proceeds from all serious crimes. The newly expanded law nominally obligates domestic financial institutions (not offshore banks) and other businesses (such as money exchangers) to identify their clients, report currency transactions over $10,000, report suspicious transactions, keep financial records for at least five years, and identify the beneficial owners of accounts and transacted funds.







While law 8204, in theory, covers the movement of all capital, current regulations based on 8204, Chapter IV, Article 14, apply a restrictive interpretation that covers only those entities involved in the transfer of funds as a primary business purpose. The 2002 law does not cover casinos, jewelry dealers or Internet gambling operations whose primary business is not the transfer of funds.

The reforms to Law 7786 do not grant SUGEF the authority to conduct on-site money laundering inspections or to incorporate money laundering compliance testing into the inspections it does conduct, such as the prudential safety and soundness inspections that are carried out under Law 7558. Costa Rica has yet to prosecute anyone successfully under its anti-money laundering law.

Costa Rica’s financial intelligence unit (FIU), the Centro de Inteligencia Conjunto Antidrogas/Unidad de Analisis Financiero (CICAD/UAF), became operational in 1998 and was admitted into the Egmont Group of FIUs in May 1999.

Despite commitment and expertise, the FIU is ill equipped to handle its current caseload (currently more than 230 cases) and to provide the information needed by investigators. Nevertheless, the unit’s analysis of the rotation of currency with no evident means of income led to the arrest in June 2003 of eight suspects in a narcotics distribution case.

Another case involved the transfer of capital between Costa Rica, Nicaragua and Guatemala that led to the arrest of six suspected narcotics traffickers in December 2003. The unit has also collaborated with the FBI on a suspected sweepstakes fraud in which the “winners” pay an administrative fee of up to $1,000 to various Costa Rican accounts through wire transfers. A new SUGEF regulation permitting regulatory entities to send incomplete Suspicious Activity Reports back to the drafting bank may reduce the number of inadequate reports and give the FIU better information to analyze.

Costa Rican authorities continue to lack the ability to block, seize, or freeze property without prior judicial approval. Thus, Costa Rica lacks the ability to expeditiously freeze assets connected to terrorists and terrorism.

Regarding terrorism and terrorist financing, Costa Rica has ratified all major antiterrorism conventions. A government interagency Task Force recently completed drafting a comprehensive antiterrorism law with specific terrorist financing provisions. The draft law would expand existing conspiracy laws to include the financing of terrorism.

It would also enhance existing narcotics laws by incorporating the prevention of terrorism finance into the mandate of the Costa Rican Drug Institute. The antiterrorism legislation will be introduced during the December 2003 to May 2004 extraordinary session of the Legislative Assembly.

Costa Rica is a party to the 1988 UN Drug Convention, the UN International Convention for the Suppression of the Financing of Terrorism, and the UN Convention against Transnational Organized Crime. Costa Rica has also signed the OAS Inter-American Convention on Mutual Assistance in Criminal Matters. Costa Rica is a member of the Caribbean Financial Action Task Force (CFATF) and the aforementioned Egmont Group.

Costa Rica needs to improve its supervision of the offshore banking sector located in the country and should extend its anti-money laundering regime to cover the Internet gaming sector and other nonbank financial institutions such as jewelry or gem dealers and casinos. Costa Rica should also criminalize the financing and support of terrorists and terrorism. Greater attention should also be given to the needs of the FIU, which is currently unable to adequately support the needs of law enforcement. These are major deficiencies in Costa Rica’s anti-money laundering regime that need to be addressed if the country is to build on the progress it has made in this area.