U.S. Department Reports
2009 International Narcotics Control Strategy Report (INCSR)
Bureau of International Narcotics and Law Enforcement Affairs
February 27, 2009
Volume II: Money Laundering and Financial Crimes
Bulgaria
The Government of Bulgaria (GOB) needs to seriously strengthen its anti-money laundering regime. While Bulgaria is not considered an important regional financial center or an offshore financial center, it is significant in terms of its geographical position, its well-developed financial sector relative to other Balkan countries, its relatively lax regulatory control, and its government tolerance of corruption and failure to strictly enforce anti-money laundering (AML) laws. Moreover, Bulgaria is a major transit point for the trafficking of drugs and persons into Western Europe, generating criminal proceeds that are subsequently laundered in Bulgaria. Bulgaria is primarily a cash economy, thereby making it more difficult to trace illicit money flows. ATM and credit card fraud remain serious problems. Tax fraud is prevalent. Smuggling remains a problem, reportedly sustained by corrupt Bulgarian businessmen and politicians. Organized crime groups are moving into legitimate business operations, making it difficult to determine the origins of their wealth. While tourism and construction formed the basis for the country’s economic revival in recent years, they have also become favorite money laundering routes for organized crime groups with suspected ties to politicians.
Since its admission to the European Union (EU) in 2007, Bulgaria has faced constant criticism and pressure from the European Commission (EC) regarding its failure to effectively combat corruption. Public officials, watchdog institutions, and journalists who challenge organized crime operations often face intimidation. Corruption, fraud, and organized crime are such pervasive problems in Bulgaria that the EU stripped the country of 220 million Euros (approximately $285,200,000) of funds in November 2008 and said Bulgaria might lose another 340 million Euros (approximately $440,700,000) if it failed to curb corrupt practices and political interference in funding processes by the end of 2009. Although Bulgaria has launched several investigations into government officials and businessmen suspected of funds fraud, it has failed to convict a single senior official of graft and has jailed only one organized crime leader.
Despite the prevalence of corruption and weak enforcement of AML laws, Bulgaria has managed to make some progress in 2008. Facing sharp EU, U.S. and civil society criticism, the Bulgarian government finally closed all duty free shops and petrol stations at Bulgaria’s land borders in July 2008. These establishments had been suspected to be major centers for contraband, tax evasion, and money laundering. In October 2008, after repeated requests by the U.S. and EU, and after protracted delays, the government decided to mandate that the actual amount of a cash transaction be listed on reporting forms. This closed an important loophole in AML legislation that had previously served to facilitate money laundering. Despite these improvements, the GOB’s AML efforts still need substantial intensification.
Article 253 of the Bulgarian Penal Code criminalizes money laundering related to all crimes. As such, drug-trafficking is but one of many recognized predicate offenses. Amendments made to the Penal Code in 2006 increase penalties (including in cases of conspiracy and abuse of office), clarify that predicate crimes committed outside Bulgaria can support a money laundering charge brought in Bulgaria, and allow prosecution on money laundering charges without first obtaining a conviction for the predicate crime.
The Law on Measures against Money Laundering (LMML) is the legislative backbone of Bulgaria’s AML regime. Adopted in 1998, the LMML has since been amended several times, most recently in 2008. The many revisions to the law, though often in the right direction, have rendered the law less comprehensible and hence less effective. Bulgaria has strict and wide-ranging banking, tax, and commercial secrecy laws that limit the dissemination of financial information absent the issuance of a court order. The 2006 amendments to the Law on Credit Institutions facilitate the investigation and prosecution of financial crimes by giving the Prosecutor General the right to request financial information from banks without a court order in cases involving money laundering and organized crime.
In response to pressure from the EU, in 2006, Bulgaria’s Parliament tightened the LMML with further amendments. These amendments expand the definition of money laundering and the list of reporting entities; outlaw anonymous bank accounts; expand the definition of “currency”; and require the disclosure of the source of currency exported from the country. Under the LMML, 30 categories of entities, including lawyers, real estate agents, auctioneers, tax consultants, and security exchange operators are required to file suspicious transaction reports (STRs). The banking sector, with some key exceptions, has substantially complied with the law’s filing requirement. Reporting by other sectors, in particular reporting related to the explosion of real estate transactions (e.g., notaries and real estate agents), has been much lower.
The Law on Administrative Violations and Penalties, as amended in 2005, establishes the liability of legal persons (companies) for crimes committed by their employees.
Bulgaria’s financial intelligence unit (FIU), the Financial Intelligence Directorate (FID) within the State Agency for National Security (DANS) is the main administrative unit for collecting and analyzing information on suspected money laundering transactions. The FID-DANS does not participate in criminal investigations. In the past year, FID has had its powers severely limited. Prior to December 2007, Bulgaria’s FIU was a fully independent agency operating under the Ministry of Finance (MOF), with the independence of its director guaranteed by the LMML. It had the authority to perform onsite compliance inspections, obtain information without a court order, share all information with law enforcement, and receive reports of suspected terrorist financing. However, on December 11, 2007, the Parliament passed legislation that came into force on January 1, 2008, which limits the FID’s effectiveness and autonomy. This law, the Act on the State Agency for National Security, establishes DANS as the new national intelligence agency. The law also restructures the FID by changing its status from an independent agency within the MOF to a directorate within the DANS; consequently, the FID is no longer an individual legal entity with its own budget. Some of the FID’s previous authorities were removed from the law and included only in regulations, further diminishing the FID’s status. Other authority was assigned to the director of DANS, but not expressly to the FID, thereby limiting its ability to compel legal compliance by banks. In addition, discrepancies between the LMML and the law creating DANS create uncertainty regarding the FID’s inspection and sanctioning authorities, including its ability to perform AML on-site inspections. In addition, the analytical capacity of FID is not precisely defined: the DANS law permits the FIU to acquire and handle national security-related information, but financial crimes information is not necessarily of national security importance. From January 1 to May 1, 2008, the Egmont Group of FIUs temporarily suspended Bulgaria’s access to its secure information exchange system, pending a review of FID’s authorities under the new legislation.
As of September 2008, the FID-DANS conducted 46 on-site inspections and issued 44 penal decrees totaling 119,500 BGN (approximately $78,826), as compared with 83 such inspections of banking and nonbanking institutions as of October 2007. As of September 2008, there was only one on-site inspection of a bank, and the bank challenged the powers of FID-DANS inspectors to ask for information necessary for completing the inspection. FID-DANS proposed the issuance of three criminal citations related to that on-site inspection for refusal to provide access to bank documents and clients’ files.
Banks and the 29 other reporting entities under the LMML are required to apply “know your customer” (KYC) standards. Since 2003, all reporting entities are required to ask for the source of funds in any transaction greater than 30,000 BGN (approximately $22,500) or foreign exchange transactions greater than 10,000 BGN (approximately $7,500). Reporting entities are also required to notify the FID-DANS of any cash payment greater than 30,000 BGN ($22,500). Because of inconsistent interpretation of the cash reporting requirement, some believe it covers only cash deposits, allowing a loophole to exist to the benefit of money launderers by leaving an unknown percentage of large cash withdrawals or exchanges unreported. As mentioned previously, as of January 1, 2009, Bulgarian banks will have to include the actual amount of all cash deposits above the 30,000 BGN (approximately $22,500) cash transaction reporting (CTR) threshold. This is in contrast to the previous requirement mandating banks report only that the transaction occurred but not the actual amount.
The LMML obligates financial institutions to a five-year record keeping requirement and provides a safe harbor to reporting entities. Penal Code Article 253B was enacted in 2004 to establish criminal liability for noncompliance with LMML requirements.
Bearer shares can be issued by joint stock companies, although not by banks or state companies. There are no limitations on the issuance. The identity of the first owner is registered; however, subsequent sales are not recorded. The GOB indicated these share are rarely issued.
Bulgaria does not systematically track cross-border electronic currency transactions, thereby making Bulgaria an attractive entry point to funnel money into the European financial system. During the year, the FID-DANS noted an increase in flows of money through Bulgaria. Bulgaria’s Customs Agency collects criminal intelligence from its officers at points of entry, reviews cash reporting documents, and requests assistance from foreign partners to determine whether cash couriers are engaged in criminal activity. Customs officers have intercepted enormous quantities of cash in hidden compartments in cars.
Cash transactions in Bulgaria have grown an average of 46 percent per year over the past three years (while the economy has grown, on average, about seven percent). In 2008, the FID-DANS received 344,897 CTRs, but only 592 STRs for a total value of 257,459,070 euros (approximately $347,569,740). Banks submitted 515 of the STRs. Given the scale of growth of cash transactions over the 30,000 BGN (approximately $22,500) reporting threshold, the number of STRs is exceptionally low. Some banks in Bulgaria have not filed any suspicious transaction reports in the past three years, with no clear consequence for the vast majority of them. Other locally-owned Bulgarian banks do inordinate volumes of their business in cash. Despite the cash intensive nature of Bulgaria’s economy, the large volume of cash transactions being observed in Bulgarian business is disproportionate to ordinary, customary, and normal practices.
Historically lower rates of reporting compliance by exchange bureaus, casinos, and other nonbank financial institutions can be attributed to numerous factors, including a lack of understanding of, or respect for legal requirements; lack of inspection resources; and the general absence of effective regulatory control over the nonbank financial sector. According to its most recent evaluation of Bulgaria conducted in 2007, the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), a Financial Action Task Force-style regional body, noted deficiencies in Bulgaria’s STR reporting regime, citing (among other problems) a lack of reporting from nonbanking financial institutions. During 2008, FID-DANS noted that while the compliance by nonbank entities remained low, the quality of their STRs improved. As of September 2008, the FID-DANS inspected eight exchange offices, imposing fines in seven cases for a total of 20,000 BNG (approximately $13,000) for failure to identify clients or request declarations on the origin of funds, and for not filing STRs.
DANS and the Prosecution Service drafted an instruction regulating interaction mechanisms between the two entities, including elements on interaction of FID-DANS and the Prosecutors Office. The instruction also establishes a permanent Contact Group of four prosecutor sector heads within the Supreme Prosecutors Office of Cassation and four directors from DANS, including the FID Director, to coordinate and manage cooperation between the two entities. DANS also drafted another instruction regulating interaction mechanisms between DANS and the Interior Ministry. These two instructions, signed by the Chairman of DANS and the Prosecutor General and Minister of Interior, respectively, replace the prior instructions on cooperation mechanisms.
Although case law remains weak, there has been an increase in the prosecution of money laundering cases. In October 2006, the courts rendered the country’s first two convictions for money laundering. Bulgaria still has failed to convict a major high-profile organized crime figure, and most money laundering cases involve relatively small amounts of money and lower level crime figures. In the first half of 2008, prosecutors worked on 106 pre-trial investigations compared to 54 for the same period of 2007, or a 51 percent increase in caseload. During this period, prosecutors filed five indictments in court (equal to the number of indictments in the first half of 2007), against eight persons (as compared to five persons in the first half of 2007). There were two convictions (as compared to four in the first half of 2007) and no acquittals. Bulgaria’s location as a crossroads for the entry into Europe of southwest Asian narcotics suggests that drug monies flow as well, as do proceeds from trafficking in persons and other crime activities. Money laundering has not figured prominently in legal cases against such perpetrators, though the Ministry of Interior is eager to strengthen its capacity in this area.
Although there are few indications of terrorist financing directly connected with Bulgaria, the possibility remains that terrorism-related funds can transit Bulgarian borders through cash couriers and other informal mechanisms. In 2008, FID-DANS received only one STR in the amount of 1,681,248 euros (approximately $2,269,685) related to possible terrorist financing. To date, no suspected terrorist assets have been identified, frozen, or seized by Bulgarian authorities. Article 108a of the Penal Code criminalizes terrorism and terrorist financing. Article 253 of the Criminal Code qualifies terrorist acts and terrorist financing as predicate crimes under the “all crimes” approach to money laundering. In February 2003, the GOB enacted the Law on Measures Against Terrorist Financing (LMATF), which links counterterrorism measures with financial intelligence, and compels all covered entities to report any suspicion of terrorist financing or pay a penalty of up to 50,000 BGN (approximately $37,500). The law authorizes the FID to use its resources and financial intelligence to combat terrorist financing along with money laundering. Bulgaria’s STR reporting requirements with regard to terrorist financing are still deficient, however, lacking a reporting obligation covering funds suspected to be linked to terrorists or terrorist financing.
Under the LMATF, the GOB may freeze the assets of a suspected terrorist for 45 days. Key players in the process of asset freezing and seizing, as prescribed in existing law, include the MOI, DANS, Council of Ministers, Supreme Administrative Court, Sofia City Court, and the Prosecutor General. The FID-DANS and the Bulgarian National Bank circulate the names of suspected terrorists and terrorist organizations found on the UNSCR 1267 Sanctions Committee’s Consolidated List, the list of Specially Designated Global Terrorists designated by the U.S. pursuant to Executive Order 13224, and those designated by the relevant EU authorities.
Although alternative remittance systems may operate in Bulgaria, their prevalence is unknown, and there are no reported initiatives underway to address them. In general, regulatory controls over nonbank financial institutions are weak, with some of those institutions engaging in banking activities absent any regulatory oversight. Some anecdotal evidence suggests that charitable and nonprofit legal status is occasionally used to conceal money laundering.
The Bulgarian Penal Code provides legal mechanisms for forfeiting assets (including substitute assets in money laundering cases) and instrumentalities. Both the money laundering and the terrorist financing laws include provisions for identifying, tracing, and freezing assets related to money laundering or the financing of terrorism. A civil asset forfeiture law, targeted at confiscation of illegally acquired property, came into effect in March 2005. The law permits forfeiture proceedings to be initiated against property valued in excess of 60,000 BGN (approximately $45,100) if the owner of the property is the subject of criminal prosecution for enumerated crimes (terrorism; drug-trafficking; human trafficking; money laundering; bribery; major tax fraud; and organizing, leading, or participating in a criminal group); and a reasonable assumption can be made that the property was acquired through criminal activity. As required by the law, an Assets Forfeiture Commission was established and became operational in 2006. The Commission has the authority to institute criminal asset identification procedures, as well as request from the court both preliminary injunctions, and ultimately, the forfeiture of assets. Since its establishment, the Commission has faced strong criticism and demands for its closure from both government officials who question its effectiveness and politically connected businessmen allegedly protecting their interests. Initial indications show that the Commission is starting to become effective despite the fact that the process is slow, requires preliminary criminal prosecution against the owner, and often results in assets being transferred to relatives or significantly undervalued. As of October 2008, the Commission froze five million BGN (approximately $3,300,000). During this period, the Commission noted that first instance courts in six cases (approximately 80 percent of the cases) granted claims for 2.8 million BGN (approximately $1,800,000). In one case, the Commission accepted a conviction from a U.S. federal court as the basis for asset freezing and forfeiture proceedings in Bulgaria.
In September 2007, the United States and Bulgaria signed a mutual legal assistance treaty (MLAT), implementing the U.S.-EU Mutual Legal Assistance Agreement, which has yet to come into force. As of October 2007, the FID had bilateral memoranda of understanding (MOU) regarding information exchange relating to money laundering with 28 countries. The FID-DANS is authorized by law to exchange financial intelligence on the basis of reciprocity without the need of an MOU. As of October 2007, the FID-DANS sent 261 requests for information to foreign FIUs and received 54 requests for assistance from foreign FIUs.
Bulgaria participates in MONEYVAL, and the FID Director is the current Chairman of MONEYVAL. The FID-DANS is a member of the Egmont Group. Bulgaria is a party to the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, the UN Convention for the Suppression of the Financing of Terrorism, and the UN Convention against Corruption.
Until December 2007, Bulgaria’s legislative framework was largely viewed as consistent with international AML standards. The Act on the State Agency for National Security compromised the FID’s independence and investigatory mandate. It is essential that the Government of Bulgaria rectify these shortcomings. It must clarify and strengthen the FID’s inspection and sanctioning authorities. The GOB should also take steps to improve and tighten its regulatory and reporting regime, particularly with regard to nonbank sectors, bearer shares, and cash payments, including cash withdrawals and exchanges, cross border transactions, and real estate transactions. The GOB should correct the deficiencies in its STR system regarding suspected terrorist financing. The GOB should improve the consistency of its customs reporting enforcement and should also establish procedures to identify the origin of funds used to acquire banks and businesses during privatization. Interagency cooperation should be streamlined to ensure effective implementation of Bulgaria’s anti-money laundering and counterterrorist financing regime, and to improve prosecutorial effectiveness in money laundering, trafficking, narcotics, and terrorist financing cases. To improve judicial review of money laundering cases, the Government should enhance the capacity of judges regarding money laundering and promote a consistent interpretation of money laundering and asset forfeiture laws. In order to remove the risk that criminal interests are able to regain possession of confiscated goods, the GOB should also clarify the authorities of the Asset Forfeiture Commission so as to provide a mechanism to manage and dispose of confiscated properties.