EAG-VI / / EAG/FR (2010) 5

FIRSTMUTUALEVALUATIONOFTHE KYRGYZ REPUBLIC

Fifth progress report

on implementation of EAG mutual evaluation recommendations

I. INTRODUCTION

  1. The purpose of this document is to present to the EAG Plenary meeting the 5thfollow-up report of the Kyrgyz Republic that describes measures taken by the Kyrgyz Republic to address the deficiencies revealed in the course of mutual evaluation. TheEAGPlenarymeetingheardthe first, second, third and fourth progress reports of the Kyrgyz Republic in December 2007, July 2008, December 2008, and December 2009 respectively, and the Kyrgyz Republic was requested to present the next report by December 2010.
  1. In relation to the FATF Core and Key RecommendationstheKyrgyzRepublicreceived “partiallycompliant” ratingforRecommendation 1 (MLoffence), Recommendation 5 (CustomerDueDiligence), Recommendation 13 (Suspicioustransactionreporting), Recommendation 23 (Regulation, supervisionandmonitoring), Recommendation 35 (Conventions), SpecialRecommendationV (Internationalcooperation) and “non-compliant” ratingforRecommendation 3 (Confiscationandprovisionalmeasures), SpecialRecommendationI (Implementation of UN instruments), Special Recommendation II (Criminalization of terrorist financing), Special Recommendation III (Freeze and confiscation of terrorist assets). TheKyrgyzRepublicreceived “partiallycompliant” and “non-compliant” ratings for 33 Recommendations as specified below.

Partially incompliant (PC) / Non-compliant (NC)
R.1 (MLoffense)
R.2 (ML offense – mental element and corporate liability)
R.5 (Customer Due Diligence)
R.11 (Unusual transactions)
R.13 (Suspicious transaction reporting)
R.15 (Internal controls, compliance and audit)
R.17 (Sanctions)
R.21 (Special attention for higher risk countries)
R.23 (Regulation, supervision and monitoring)
R.25 (Guidelinesandfeedback)
R.27 (Law enforcement authorities)
R.29 (Supervisors)
R.33 (Legal persons – beneficial owners)
R.35 (Conventions)
R.38 (MLA on confiscation and freezing)
R.39 (Extradition)
SR.V (International cooperation)
SR.IX (Cross-border declaration and disclosure) / R.3 (Confiscation and provisional measures)
R.6 (Politicallyexposedpersons)
R.8 (New technologies and non face-to-face business)
R.12 (DNFBP – R.5, 6, 8-11)
R.16 (DNFBP – R.13-15 and 21)
R.22 (Foreign branches and subsidiaries)
R.24 (DNFBP – regulation, supervision and monitoring)
R.30 (Resources, integrity and training)
R.32 (Statistics)
SR.I (Implementation of UN instruments)
SR.II (Criminalization of terrorist financing)
SR.III (Freeze and confiscation of terrorist assets)
SR.VI (AML requirements for money/value transfer services)
SR.VII (Wire transfer rules)
SR.VIII (Non-profit organizations)
  1. ThefirstprogressreportoftheKyrgyzRepublicnotedthatseveralgapsinregulation of non-banking sector supervised by Financial Supervisionservice of Kyrgyzstan were removed due to adoption by Financial Supervisionserviceof several regulations in AML/CFT sphere on internal control, customer identification, etc. The analysis of compliance of these regulations with FATF Recommendations was presented to the 7th EAG Plenary meeting. Following the review of information presented by the Kyrgyz Republic it was noted that the majority of institutional and legislative measures are presently either under development or under consideration of the Parliament. In particular it was noted that measures taken by the Kyrgyz Republic are aimed at addressing the deficiencies revealed in relation to R. 5, 10, 11, 13, 15, 26, 27, 30.
  1. The 2nd progress report of Kyrgyzstan was presented at the 8th EAG Plenary meeting. This report described the most important measures taken by the Kyrgyz Republic to remedy the deficiencies in relation to legal and financial recommendations (R. 1, 2, 3, 4, 5, 17 andSR. I, II, III). One of those measures was adoption in the first reading of amendments to laws in order to implement international requirements. TheseamendmentsconcernedtheCriminalCode, Customs Code, Civil Code, and a number of industry regulations in major financial sectors.
  1. Followingthediscussionofthe 3rdreportoftheKyrgyzRepublicinDecember 2008 progresswasnotedintheareaoflegalandfinancialrecommendationsinconnectionwithadoptionofseveralregulations. In this regard the EAG Plenary meeting noted that since mutual evaluation report approval in July 2007 the Kyrgyz Republic had achieved significant progress in two out of three core blocks of FATF Recommendations (financial and legal). Followingthediscussionandinconnectionwithsignificantprogressof the Kyrgyz Republic inrelation to R. 1, 2, 3, 4, 5, 6, 13, 15, 17, 26, 27, 31, SR. I, II. IIIthe 9th EAG Plenary meeting decided to removethe Kyrgyz Republic from the enhanced monitoring procedure (EAG/FR (2008) 4).
  1. As the 4th progress report of the Kyrgyz Republic stated, the Kyrgyz Republic carries out an administrative reform of the state apparatus that affects several components of the national AML/CFT system. In particular, in accordance with the reform of legal system the right to adopt binding legal regulations is given exclusively to the Parliament, the President of KR and the Cabinet of Ministers of KR. Same applies to departmental legal regulations in AML/CFT sphere that are adopted in the new government edition. Itshouldbenotedthatthisadministrativereformis ongoing.

II. THE KYRGYZ REPUBLIC PROGRESS REVIEW SINCE DECEMBER 2009

  1. This section highlights the most significant measures taken by the Kyrgyz Republic since December 2009 to remedy the deficiencies revealed in the course of mutual evaluation. Appendix 2 describesthesemeasuresinmoredetails.

General situation

  1. Since December 2009 the Kyrgyz Republic has adopted new laws and regulations regarding AML/CFT:
  • Resolution of the Government of the Kyrgyz Republic of February 12, 2010 N 95 “On approval of the Regulation on forming of the list of physical and legal entities in relation of which there is information on their participation in terrorist or extremist activities (financing terrorism or extremism) and communication of this list to people providing information (hereinafter – Resolution N 95);
  • ResolutionoftheGovernmentoftheKyrgyzRepublicofMarch 5, 1020 N 135 “On measures for implementation of the Kyrgyz Republic Act “On combating terrorist financing and legalization (laundering) of crime proceeds” (hereinafter – Resolution N 135);
  • Decree of the President of the Kyrgyz Republic “On State financial intelligence service of the Kyrgyz Republic” of February 19, 2010 N 58 (hereinafter – Decree of the President of KR N 58);
  • ResolutionoftheBoardoftheNationalBankoftheKyrgyzRepublicofFebruary 24, 2010 N 3/9 “On introduction of amendments and additions to the resolution of the Board of the National Bank of the Kyrgyz Republic of February 19, 2003 N 4/4 “On Interim instruction on handling deposits”, registered in the Ministry of Justice of the Kyrgyz Republic on March 25, 2003 with registration N 25-03 (hereinafter – Resolution of NB KR N 3/9);
  • Resolution of the Board of the National Bank of the Kyrgyz Republic of May 26, 2010 N 36/7 “On approval of the Regulation “On basic requirements to commercial banks activities at conclusion of agent agreement for provision of bank retail services” (hereinafter – Resolution of NB KR N 36/7);
  • ResolutionoftheBoardoftheNationalBankoftheKyrgyzRepublicofJune 30, 2010 N 62/5 “OnapprovaloftheRegulation “Onminimum requirements to internal control organization in exchange offices in the Kyrgyz Republic in order to combat terrorist (extremist) financing and legalization (laundering) of crime proceeds” (hereinafter – Resolution of NB KR N 52/5);
  • OrderoftheStatefinancialintelligenceserviceoftheKyrgyzRepublicofMarch 30, 2010 N 13/P «On implementation of the Resolution of the Government of the Kyrgyz Republic “On measures for implementation of the Kyrgyz Republic Act “On combating terrorist financing and legalization (laundering) of crime proceeds” (hereinafter – Order of SFIS N 13/P).

9.TheseregulationsgenerallyaimatfurtherharmonizationofKRlegislationandbringingitintocompliancewiththebasicAML/CFTActandinternationalstandardsinAML/CFTsphere. Amendmentsmadetotheselawsallowedfor improvingtheleveloftheKyrgyzRepubliccompliancewithcriteriaofR. 5, 8, 11, 12, 13, 15, 16, 21, 23, 30 and SR. IIIthat are specified in more details in the Appendix 3 to this document.

Core recommendations (R. 5)

Recommendation 5 (Customer Due Diligence)

  1. InaccordancewithResolutionN 135 financial institutions use questionnaires for identification and verification of customers. According to this questionnaire customer shall report the purpose and intended nature of business relations. Thisrequirementprovides the basis for meeting the requirement of theCriterion 5.6 ofRecommendation 5.
  1. Itisworthnotingthatsince themutualevaluationthe KyrgyzRepublichastakenandistakingmeasurestoaddress the deficienciesrevealedinrelation toR. 5 criteria requirements. Asitwasnotedearlierinprogressreportsverificationandidentificationofbeneficialownersrequirements for both physical and legal entities were introduced.

Key recommendations (R. 23, SR. III)

Recommendation 23 (Regulation, supervision and monitoring)

  1. In accordance with paragraph 3 of the Resolution of NB KR N 52/5, the National Bank is authorized to inspect activities of exchange offices in terms of internal control organization issues for AML/CFT reasons and submit information on the results to the State financial intelligence service of the Kyrgyz Republic in the established order.
  1. InaccordancewiththisResolutioninternalcontrolrules are required to be implemented for exchange offices, which allow regulating, supervising and monitoring for all reporting entities. AlsoaccordingtothisResolutionthe supervisor for exchange officers is entitled to check the observation of the AML/CFT Law requirements and impose sanctions for violations.

Special recommendationIII (Freeze and confiscation of terrorist assets)

  1. TheResolutionoftheKyrgyzRepublicN 135 approved “Regulation on the procedure of freezing operations (transactions) with funds or property”. This Regulation defines the procedure of issuing by the State financial intelligence service of the Kyrgyz Republic orders to freeze operations (transactions) with funds or property in cases stipulated by the AML/CFT Law. This regulation also sets timeframefor issuingorders and their communication to reporting entities.
  1. In accordance with this SFIS Regulation, if information received by SFIS on suspension of operation by financial institution is deemed validbased on results of preliminary checks, the SFIS issues an order to suspend the operation for up to 5 working days.
  1. TheResolutionalsostatesthatincasethe SFISreceivesfromlawenforcementbodiessufficientinformationoninvolvement of physical and legal persons into terrorist (extremist) financing, SFIS issues an order to include that person into the list of persons involved in terrorist financing.
  1. This raises some technical issues regarding the timeframeset for law enforcement bodies to check involvement of physical and legal entities into terrorist (extremist) financing, and besides that, further measures connected to cooperation of SFIS with law enforcement bodies with regard to freezing terrorist assets are not clear.

Otherrecommendations (R. 21)

Recommendation 21 (Special attention for higher risk countries)

  1. In accordance with Article 3, part 7 of the Kyrgyz Republic Law on AML/CFT, the decree of the State financial intelligence service of the Kyrgyz Republic of March 30, 2010 N 13/P (as amended by decree of July 26, 2010 N 30/P) approved the List of states and territories that do not apply or apply insufficiently the FATF Recommendations and do not take part in international cooperation in the sphere of combating terrorist financing and legalization (laundering) of crime proceeds.
  1. Inaccordancewiththisarticle of the AML/CFTLawfinancial institutions should pay special attention to business relations and operations with organizations and entities from states and territories from the List, as well as with branches, subsidiaries and representative offices of companies registered in such states and territories. The List is published at SFIS website and partly matches with the FATF list of states and jurisdictions, and presently contains 3 such jurisdictions.

Efficiency and statistics

  1. Takingintoaccounttheprovidedstatisticsthe efficiency of the FIUincarryingoutfinancialinvestigationsshouldbenoted. There is also tight cooperation between SFIS and financial institutions in obtaining additional information upon request. Efficiency in the supervisory area is noted in the supervision practice and sanctions, especially in organizations supervised by the National Bank of KR (banks, financial-credit organizations, exchange offices, pawn shops), Financial supervision service (insurance companies, professional participants of securities market, casinos, lotteries), and the Ministry of Finance (persons performing operations (transactions) with precious metals and gems, jewelry).

III. CONCLUSION

  1. FortheperiodsinceDecember 2009 theKyrgyzRepublichasachievedmajorprogressinrelation tofinancialrecommendationsbyadoptinganumberofamendmentstoregulations, in particular that is connected toR. 5, 21, 23 and SR. III.
  1. In this regard it seems appropriate to request the Kyrgyz Republic to present the next progress report at the 15th EAG Plenary meeting in December 2011.

EAG Secretariat

November 26, 2010

EAG-VI / / EAG/FR (2010) 5Annex 1

STATE OF the KYRGYZ REPUBLIC
SUMMARY

for the 5 th Progress Report on the IMPLEMENTEATION OF recommendations of the appraisers mission of EAG

1.During the reporting period to implement the recommendations of the EAG evaluators the following work has been done:

1) A resolution of the Government of the Kyrgyz Republic on February 12, 2010 № 95 "On Approval of the procedure of forming a list of individuals and legal persons against whom there is information about their involvement in terrorist or extremist activities (financing of terrorism or extremism) and bring it tothe attention of those persons who represent the information."
This resolution:

- Determines the order of forming the list of individuals and entities against which there is information about their involvement in terrorist and / or extremist activities (financing of terrorism or extremism) and bring it to the attention of those persons who represent the information (hereinafter - the List);

- Sets the base for the formation of the List, and making changes and additions, as well as base to exclude a person from the List;

- Defines the public authorities of the Kyrgyz Republic, branched to the provision of information in order to create the List;

- Sets the structure of the list and order of publication.

- Sets the function of the State financial intelligence units of the Kyrgyz Republic on the formation of the list.

It should be noted that the adoption of the provisions allows to correct disadvantages on CP.III.

2) A resolution of the Government of the Kyrgyz Republic on March 5, 2010 № 135 "On measures to implement the Law of the Kyrgyz Republic "On Terrorism Financing and Legalization (laundering) of proceeds from crime counteraction" is adopted.

The following provisions are approved according to this resolution of the Government of the Kyrgyz Republic:

a) The provision of the general requirements of the rules of internal controls to counter the financing of terrorism (extremism) and the legalization (laundering) of proceeds of crime;

This provision defines a common approach to the development of rules of internal control, implemented in order to counter terrorist financing (extremism) and the legalization (laundering) of proceeds from crime by persons,who represent the information.

It should be noted that the adoption of the provisions allows to correct disadvantages on P. 5, 11, 12, 13, 15, 16 and 21.

b) The regulation on identification and verification of customer and the beneficial owner (beneficiary) in order to counter terrorist financing (extremism) and the legalization (laundering) of proceeds of crime;

This Regulation establishes general requirements for identification and verification of persons who represent the information, customer and the beneficial owner (beneficiary) for the implementation of the Law of the Kyrgyz Republic "On Terrorism Financing and Legalization (laundering) of proceeds of crime counteraction";

It should be noted that the adoption of the provisions allows to correct disadvantages on Р. 5, 6 and 8.

a) The Regulation on the procedure for representing of documents and information by public authorities of the Kyrgyz Republic, and persons representing the information to the State financial intelligence units of the Kyrgyz Republic;

This Regulation defines the procedure ofrepresenting by public authorities of the Kyrgyz Republic information and documents (except the information about the private lives of citizens) needed to carry out the functions and objectives of the FIS of the Kyrgyz Republic, and establishes a unified format for the representing to FIS information on transactions (deals) withmoney or property subject to mandatory control and suspicious transactions (deals) as well as for other transactions (deals) with funds or property related to the financing of terrorism (extremism) or the legalization (laundering) of proceeds from crime by persons who represent information.

It should be noted that the adoption of the provisions allows to correct disadvantages onР. 13 and 16.

d) Regulation on representing and consideration of generalized information;

This regulation defines a unified procedure of forming, representing, recording and reviewing a generalized information with respect to transactions (deals) connected with the financing of terrorism (extremism) or the legalization (laundering) of proceeds from crime, and also defines the procedure of representing of information about the progress of the generalized information reviewing by law enforcement agencies to the State financial intelligence units of the Kyrgyz Republic.

e) Regulation on the procedure of freezing of transactions (deals) in cash or property.

This Regulation defines the procedure of publication of orders of freezing of the transaction (deal) with funds or property in cases stipulated by the Law of the Kyrgyz Republic "On Terrorism Financing and Legalization (laundering) of proceeds from crime counteraction" by the State financial intelligence units of the Kyrgyz Republic.

It should be noted that the adoption of the provisions allows to correct disadvantages on WedIII.

3) A resolution of the Board of the National Bank of the Kyrgyz Republic on June 30, 2010 № 52 / 5 "On Approval of “Regulation on Minimum Requirements for Internal Control in the exchange offices in the Kyrgyz Republic” in order to counter terrorist financing (extremism) and the legalization (laundering) of proceedsof crime" was approved.

The main purpose of this resolution is to define minimum requirements for internal control in the exchange offices licensed by the National Bank of Kyrgyz Republic in order to counter terrorist financing (extremism) and the legalization (laundering) of proceeds from crime.

According to this resolution, the National Bank inspects the activities of currency exchange offices in respect of organization of internal controlwith the purpose of ML / FT and sends information about its results to the State financial intelligence units of the Kyrgyz Republic in the established order.

It should be noted that the adoption of the provisions allows to correct disadvantages on P. 23.

4) The Order of the financial intelligence units of the Kyrgyz Republic on March 30, 2010 № 13 / P "On the implementation of resolutions of the Government of the Kyrgyz Republic “On Measures for the Implementation of the Law of the Kyrgyz Republic "On Terrorism Financing and Legalization (laundering) of proceeds of crime counteraction" has been signed.

The guides, lists, sample forms, forms, instructions (in detail in the review of regulatory legal acts of the Kyrgyz Republic)was approved in accordance with this order.

It should be noted that the adoption of the provisions allows to correct disadvantages on P. 11, 12, 21 and 25.

8) 7 learning activities with the assistance of MUMTSFM, the OSCE and the IMF have been donefor 10 monthsof 2010 in order to train law enforcement officers and officers of government financial intelligence units of the Kyrgyz Republic.

It should be noted that the adoption of the provisions allows to correct disadvantages on P. 30.

In general,the State financial intelligence units of the Kyrgyz Republic has done work to correct the disadvantages relating to the P. 5, 6, 8, 11, 12, 13, 15, 16, 21, 23, 25, 30, and WedIII during the period.
In addition, the results of analysis of the legislation of the Kyrgyz Republic (2009), was amended in the report of P. 3, 33, WedII and VII.

Chairman of the State

financial intelligence unit of

Kyrgyz Republic G.SHAKIROVA

ЕАG-VI / / ЕАG/FR (2010) 5Annex 2

KYRGYZ REPUBLIC TABLE OF 5 TH PROGRESS REPORT (December, 2010)

  1. Measures taken with regard to the main recommendations (Rec. 1, Rec. 5, Rec. 13, СР. II)

Recommendations

/
Brief description of the factors determining this correspondence degree
/ Description of measures taken for correction of disadvantages since the adoption of the Mutual Evaluation Report (July 2007 / December 2009) / Description of measures taken or planned after approval of the fourth progress report (from December 2009 to December 2010)
1. ML Crime / 1. ML Criminalization is not fully consistent with the Vienna and Palermo Conventions / In order to criminalize ML, in accordance with the Vienna (United Nations Convention against illegal traffic of narcotic drugs and psychotropic substances, 1988) and Palermo (United Nations Convention on Transnational Organized Crime, 2000) Conventions, the Law of the Kyrgyz Republic on October 17, 2008 № 223 "On amendments and additions to the Criminal Code of the Kyrgyz Republic" (Article 183) is adopted and entered into force.
2. The list of predicative crimes does not include 3 of 20 set by 40 FATF Recommendations of categories of predicative crimes / An inventory of the Criminal Code of the Kyrgyz Republic is made in all categories of predicative crimes set by 40 FATF Recommendations.
According to the results found that the list of predicative crimes does not include only 2 of 20 set by 40 FATF Recommendations of categories of predicative crimes.
Predicative crime as "sexual exploitation of children" covered by regulations of the Criminal Code of the Kyrgyz Republic. (Articles 124, 132, 133).
A draft law is developed on amendments to the Criminal Code of the Kyrgyz Republic, in order to institute criminal proceedings for disclosure or using of confidential information by insiders (Article 224-1) and market manipulation. The bill is under negotiation with the ministries and agencies of the Kyrgyz Republic.