## _cr10318 - 1.      The banking sector in San Marino is small in absolute terms but represents close

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---

### Overview of the financial sector
- Total assets stood at €11.5 billion as of end-June 2009.
- The banking sector is "small in absolute terms but represents close to nine times of GDP."
- Commercial banks:
  - 12 — total of commercial banks.
  - four — “historical” banks established at the end of the 19th century.
  - two — majority foreign-owned.
  - San Marino’s banks attract deposits from Italy and lend or invest them in Italy; San Marino receives more funds than it can lend domestically.
- Nonbank financial sector:
  - two — asset management companies.
  - two — recently licensed foreign life insurance companies.
  - over 50 — fiduciary, leasing, factoring, and small consumer lending companies.
  - Fiduciary companies account for the majority of the nonbank financial sector, offering fee based services for holding customers assets in their own name, but providing little or no investment or wealth management advice.

### ML/TF risks and vulnerabilities
- Level of domestically-generated proceeds of serious crime in San Marino is low.
- Vulnerability:
  - San Marino is vulnerable to money laundering (ML) of proceeds of crimes committed abroad (mostly in Italy).
  - In the past, proceeds were predominantly generated from tax evasion.
  - 2008-2009 — statistics indicate proceeds that could have been laundered in San Marino are also generated from drug trafficking, mafia-type criminal organizations, illegal banking activities, fraudulent bankruptcy, and fraud.
- Risk of terrorist financing (TF) is low.
- Features creating a favorable environment to ML:
  - Strict financial secrecy.
  - Availability of fiduciary services or corporate ownership arrangements intended to systematically hide beneficial ownership.
  - Financial instruments facilitating anonymity and easy transferability (such as bearer passbooks or bearer certificates of deposits).
  - Predominant use of cash and negotiation of large volumes of checks with multiple endorsements and illegible signatures.
  - Widespread granting by Sammarinese financial institutions of collaterals (“fideiussioni”) on loans issued by Italian or foreign banks is also said to have facilitated ML activities.
- Enforcement matters:
  - San Marino’s largest bank and its subsidiary fiduciary company are currently under criminal investigation for charges of ML and criminal association, among others.

### Recent developments in AML/CFT (timeline and measures)
- April 2008 — MONEYVAL MER adopted; on-site visit took place in March 2007.
- After the MER, San Marino was placed under enhanced scrutiny (“compliance enhancing procedure”).
- Key legislation and measures:
  - June 17, 2008 — AML/CFT law no. 92/2008 passed; modified by Law no. 73/2009 in the part concerning sanctioning for non compliance with preventive measures.
    - Prohibits anonymous accounts.
    - Establishes a full range of CDD obligations (including the obligation to identify and verify the beneficial owner).
    - Introduces a risk-based approach to CDD and record keeping requirements.
    - Establishes the Financial Intelligence Agency (FIA) as an autonomous agency within the Central Bank of San Marino (CBSM), operationally independent in implementation of the FIU’s core functions.
  - Delegated Decree no. 135/2008 (modified by Delegated Decree no. 146/2008) — further details FIA responsibilities.
  - FIA issued binding “instructions” complementary to the AML/CFT law.
  - Law no. 100/2009 — new regime for the transfer of bearer shares.
  - Law no. 104/2009 — adoption of a law on rogatory letters.
  - Delegated Decree no. 74/2009 — introduction of a declaration system for cross-border physical transportation of cash and bearer financial instruments.
  - Congress of State Decision no. 2, 2008 and subsequent amendments — measures to fight terrorism pursuant to UNSC Resolutions 1267 and 1373.
  - Law no. 98/2009 — adoption of a law on special investigative techniques (wire tapping).
  - September 22, 2009 — law decree prohibited issuance of new bearer passbooks (BP) and phased out existing ones by June 30, 2010; from that date all BPs, regardless of the balance, must be converted into nominal ones; no withdrawals/deposits can be done on existing passbooks from the date of its entry into force.
  - November 8, 2009 (ratified January 19, 2010) — law decree prohibited issuing of certificates of deposits in bearer form and required that reimbursement of existing bearer certificates in circulation be reported to the AML/CFT compliance officer for amounts exceeding EUR 15,000.
- Bank secrecy and information sharing measures:
  - Article 86 of the AML/CFT law amended Article 36 of the Law on Companies and Banking, Financial and Insurance Services (LCBFI) so bank secrecy cannot be invoked for AML/CFT-related requests by supervisory authorities and the FIA.
  - CBSM Recommendation No.2009-01 — clarifies that provision of client information to other Italian/European financial institutions to fulfill AML/CFT obligations does not constitute a breach of bank secrecy.
  - FIA Instruction No.2009-02 — requires financial institutions to provide to their foreign counterparts the information required to fulfil the latter’s CDD and AML/CFT requirements.
  - Law Decree No.65 of May 14 2009 and CBSM Regulation No.2009-03 — establish a database to facilitate interbank transmission of data on customers and beneficial owners between Sammarinese and Italian banks.
  - January 21, 2010 — Congress passed further banking secrecy amendments specifying that financial secrecy cannot be opposed to the penal judicial authority, governmental bodies responsible for exchange of information with foreign counterparts for the execution of international treaties, the CBRSM and the FIA.
- International cooperation:
  - 2008 — San Marino granted mutual legal assistance (MLA) in eight cases out of eight requests relating to ML.
  - January 1 to July 31, 2009 — nine out of nine such requests were granted.
  - INTERNATIONAL exchange by FIA with foreign counterparts has increased.
- MONEYVAL developments:
  - September 2009 — MONEYVAL lifted the compliance enhancing procedure.
  - September 2010 — planned on-site visit by MONEYVAL as part of the fourth round of mutual evaluations.

### Institutional capacity, supervision, and effectiveness
- FIA established and became operational; responsibilities include receiving, analyzing, and disseminating suspicious transactions to the judiciary.
- Human resource constraints:
  - Human resources are limited at the FIA, the Supervision Department of the CBSM, and the judiciary.
  - Judiciary: currently only one investigative judge and two aides responsible for ML investigations and handling an increasing number of MLA requests.
- Inspections and supervision:
  - AML/CFT inspections increased, especially during 2008-2009 when the FIA became operational.
  - Given poor historical implementation of AML/CFT by financial institutions and limited human resources, AML/CFT supervision should be considerably strengthened.
  - CBSM and FIA have signed a Memorandum of Understanding (MOU) on supervision; a more structured and risk-based planned approach combining CBSM and FIA synergies could remedy human resource issues in the short period.

### Legal shortcomings and specific recommendations
- General assessment:
  - AML/CFT law and FIA regulations are clearly written to match international standards and constitute significant improvement over 1998 requirements, but shortcomings remain that should be addressed to ensure full consistency with FATF Recommendations.
- Specific shortcomings:
  - Articles 36 and 103 of the LCBFI establish strict requirements that hamper broad sharing of information envisaged by FATF Recommendation 4.
  - Disclosure of confidential information to a foreign authority is prohibited without a formal agreement and written permission of the CBSM before further disclosure by the recipient; requirement that foreign confidentiality provisions be “equivalent” to San Marino is burdensome.
  - Interpretative note does not clearly override primary law; foreign-owned banks report they do not provide confidential customer information to their parent companies nor permit head office internal audit or compliance staff access to files.
  - FATF Recommendation 6 on Politically Exposed Persons (PEP): AML/CFT Law limits requirement for senior management approval to establishment of the business relationship only, not to cases where a customer becomes a PEP after acceptance.
  - Article 26 (simplified due diligence) relieves financial institutions of requirements beyond determining if the entity/product meets simplified due diligence criteria.
  - Article 23 permits starting a business relationship before completion of due diligence without requiring management of resulting risks.
  - Article 6 of FIA Instruction 2009/03 allows periodic monitoring intervals (once every two years for “limited risk customers”, once every year for “low risk customers”, once every six months for “medium risk customers”) instead of continuous monitoring, contradicting Article 22, para. 1 d) of the AML/CFT law which requires ongoing monitoring.
  - No comprehensive requirements for adequate screening procedures for employees; screening is limited to corporate officers and the general requirement that staff be suitably qualified.
- Explicit recommendations:
  - Remove the requirement that the confidentiality provisions of a foreign authority be “equivalent” to those of the CBSM and substitute the requirement that the confidentiality arrangements should be “adequate” for the protection of the information concerned, according to the judgment of the CBSM.
  - Change the LCBFI to allow foreign owned banks to share information currently subject to bank secrecy with their parent bank and home state supervisor and to specifically allow the bank-to-bank sharing of information for AML/CFT.
  - Require financial institutions to obtain senior management approval to continue the business relationship also when the customer or beneficial owner is subsequently found to be, or subsequently becomes a PEP.

### STRs and reporting trends
- 2007 — 44 STRs were reported (39 of which by banks).
- 2008 — 110 STRs were reported (79 of which by banks).
- January 1-November 6, 2009 — the FIA received 190 STRs (out of which 140 by banks).
- STRs were also filed in case of attempted transactions.
- Suspicious Transaction Reports received by FIA: Total 190; Reporting Entities (REs) 41; Total of Reporting Entities (TREs) 233; 17.6%.
- FIA breakdown (as presented):
  - Financial parties: 166 STRs; 28 REs.
  - Commercial Banks (CBs): 140 STRs; 10 REs; 12 TREs; 83.3% REs/TREs.
  - Financial and Fiduciary Companies (FFCs): 22 STRs; 15 REs; 51 TREs; 29.4% REs/TREs.
  - Central Bank of San Marino (CBSM): 2 STRs; 1 RE; 1 TRE; 100.0% REs/TREs.
  - Insurance Companies (ICs): - STRs; - REs; 2 TREs; 0.0% REs/TREs.
  - Post Offices (Pos): 2 STRs; 2 REs; 10 TREs; 20.0% REs/TREs.
  - Collective Investments Companies (SGs): - STRs; - REs; 2 TREs; 0.0% REs/TREs.
  - Insurance Intermediaries (IIs): - STRs; - REs; 44 TREs; 0.0% REs/TREs.
  - Financial Promoters (FPs): - STRs; - REs; 3 TREs; NA.
  - Professionals: 12 STRs; 9 REs; 233 TREs; 3.9% REs/TREs.
  - Notaries and Lawyers: 3 STRs; 3 REs; 113 TREs; 2.7% REs/TREs.
  - Accountants: 9 STRs; 6 REs; 120 TREs; 5.0% REs/TREs.
  - Others: 12 STRs; 4 REs; NA TREs; NA %.
  - Total: 190 STRs; 41 REs; 233 TREs; 17.6% REs/TREs.

### Implementation of AML/CFT requirements and CDD challenges
- Prior to 2008, AML requirements existed since 1999 but were not actively enforced; few detailed instructions and no inspections were conducted.
- Many customer relationships were established before current requirements and often involved abnormally large use of cash or other instruments that facilitated anonymity.
- Critical elements identified:
  - Verification of customer identity and the source of funds or income.
  - Risk-based profiling of clients.
  - Thorough ongoing monitoring of already established business relations.
- Effective CDD and ready availability of comprehensive client information are essential for financial institutions’ compliance and for authorities’ financial analysis, criminal investigations, and supervision.
- Particular relevance to San Marino because customers are mostly non-residents and client information, if not maintained locally, is accessible only via international cooperation.

### Progress and gaps in risk-profiling and monitoring
- Five banks visited adopted internal regulations/procedures between May and November 2009; three FFCs met—only one provided internal procedures.
- CDD law and FIA instruction No. 3 of 2009 require classifying clients into four risk categories using criteria from Article 25 of the AML/CFT law.
- Deadlines:
  - Risk-profiling obligation in force for customers accepted after June 1, 2009.
  - Deadline for existing customers set for December 1, 2009.
- Examples of implementation status:
  - Some banks had performed risk profiling for 75% of their clients.
  - Others had performed risk profiling for only 15% of their clients.
  - One fiduciary firm of the three visited was not aware of the obligation to risk-profile customers.
- Use of profiling software:
  - Some banks use software reliant on internal databases.
  - Proposed FIA-required software (GIANOS) presupposes uniform classifications and codes which have not yet been undertaken.
  - Risk that many existing customers will not be subject to appropriate risk profiling due to lack of historical classified data and incomplete customer information, especially among fiduciary firms.
- Few financial institutions systematically contact customers to update information; majority request updates “at the first opportunity”.
- Fiduciary clients often refuse contact for confidentiality reasons, complicating updates.

### Fiduciaries and ML vulnerabilities
- FFCs offering fiduciary services are vulnerable to ML activities and considerably weaken the AML/CFT regime.
  - Majority of ongoing ML investigations and MLA requests related to ML involve fiduciary accounts maintained by FFCs.
- Vulnerabilities derive from gaps in legal framework, poor internal AML/CFT policies/procedures, and typical services offered by fiduciaries.
- Observed issues:
  - Lack of transparency in ownership of FFCs; need to enhance mechanisms.
  - Lack of clarity on scope of activities fiduciary companies can engage in.
  - Some fiduciaries had not completed client risk profiling; unclear availability of client information introduced by third parties.
  - Fiduciary companies often act as a “shield,” maintaining omnibus accounts that commingle funds from multiple fiduciary relationships.
  - Fiduciaries have accepted abnormally large cash deposits and negotiated/cashed large volumes of multiple-endorsed checks with illegible or fictitious signatures.
  - Fiduciaries may lack adequate client information, yet can be relied upon for identification of customers by other financial institutions.
  - Financial institutions can apply simplified due diligence for bank accounts opened by a fiduciary company to manage funds on behalf of clients, a practice identified as worrisome.
- The number of FFCs filing STRs remains low compared to the overall number of fiduciary firms; fiduciaries visited by the mission had never filed an STR.

### Recommendations for FIA, banks, and supervisors (selected)
- FIA should issue instructions and modify Instruction 2009/03 to clarify that specified timeframes are only “at a minimum” and do not exclude the obligation to conduct ongoing monitoring.
- FIA should provide guidance to banks to determine which legacy customers should be regarded as high risk; suggested clarifications include:
  - Treat any customer who has made a deposit of more than a threshold set by the FIA in cash or multiple endorsed checks with a cumulative high value as high risk; Article 27 consequences should apply.
  - High-risk customers should be subject to enhanced due diligence including additional and independent verification of ownership and of funds.
  - Maintain satisfactory evidence on file showing why large quantities of cash were consistent with the customer’s legitimate business purpose.
  - Banks asked by a fiduciary to undertake a transaction for a customer they do not know should ask whether this is a high-risk customer and, if so, insist on seeing the fiduciary’s CDD information.
  - Where requirements are unmet or information is refused, banks should consider submitting an STR and refuse to undertake the transaction.
- Specific measures regarding fiduciary firms:
  - Conduct on-site visits to all FFCs to check compliance with AML/CFT requirements.
  - Prohibit omnibus accounts for the management of FFCs’ customers where funds are commingled.
  - Where a single account is maintained within a bank for an FFC, require that each fiduciary customer be specified in a separate sub-account.
  - Prohibit a financial institution from relying on a fiduciary for CDD purposes, or require the bank to first verify adequacy of the fiduciary’s CDD procedures.
  - Prohibit fiduciaries from negotiating checks.
  - Prohibit (or temporarily suspend) the application of simplified CDD by financial institutions for accounts or other relationships maintained with fiduciary firms.

### The Financial Intelligence Agency (FIA): capacity, independence, and staffing
- The FIA is the FIU of San Marino, responsible for receiving, analyzing, and disseminating to the judiciary cases of suspected ML/TF.
- Legal status:
  - FIA is an autonomous agency established within the CBSM and does not have a separate legal personality from the CBSM.
  - Legal framework vests core functions in the FIA to be exercised “in complete autonomy and independence” (Articles 2 and 4 of the AML/CFT law; Article 14 of the delegated decree).
  - Article 7 of the delegated decree states the Director shall plan, manage and control the agency’s activity in full autonomy.
- Appointment and dismissal:
  - Director appointed by the Congress of State (upon proposal of the Committee for Credit and Savings-CCS); CBSM has only a consultative role.
  - Director must possess “requisites of professionalism, independence and respectabilities” (defined by delegated decree, Articles 2-7).
  - Director can be removed if conditions for appointment are no longer satisfied or if found “guilty of serious deficiencies.”
- Staffing:
  - FIA currently has a staff of 10 (two more positions need to be filled).
  - FIA determined number of staff set at 12 for the first 2 years of operation, following a phased approach; staff numbers to be re-assessed after two years.
  - Recommendation: The FIA conduct an assessment of the need of additional staff ahead of the two-year period.
- Non-core functions and resource burden:
  - Law allows FIA to act as “judicial police” upon delegation by the judiciary (Article 5, para. 4); such activities have proven burdensome.
  - Training law enforcement authorities on AML/CFT could also be burdensome for the FIA.
  - Recommendation: The FIA needs to reconsider the utility of certain non-core functions assigned by law, given limited human resources.
- Magistrates, MLA and short-term measures:
  - Very limited number of magistrates assigned to ML/TF investigations and to deal with MLA requests.
  - Short-term response options: Increase the number of magistrates involved in ML/TF, consider establishment of a dedicated pool of magistrates responsible for investigations of financial crimes.
- Operational progress and STR handling:
  - FIA operational since November 2008.
  - Achievements: procedure for receipt of STRs in electronic format; internal database; survey among financial institutions; drafted an inspection manual; conducted inspections including checks on bearer passbooks (BPs).
  - Observation: number of STRs that after FIA analysis resulted in judicial cases is low.
- Access to foreign information:
  - FIA and law enforcement have proper access to Sammarinese governmental and commercial databases.
  - For fiduciary companies, 99% of customers are non-residents; majority of cases involve Italian residents.
  - Recommendation: FIA and law enforcement agencies seek closer cooperation with the Italian institutions responsible for AML/CFT with a view to concluding MOUs.

### Case processing and inspections (as presented)
- Case processing distribution (as presented):
  - In process 42,9%
  - Closed 53.8%
  - Court 3.2%
  - FIUs 8.3%
  - Police Forces 10.9%
  - FIA 22.4%
  - Others 1.3%
- Inspections by the FIA (January 1 to November 6, 2009):
  - On-site inspections total 39; General inspections (G) 12; Specific inspections (S) 27; Reporting entities (REs) 233; Overall % G/REs 5.2%
  - Financial institutions: On-site inspections 34; G 7; S 27.
  - Commercial Banks (CBs): On-site inspections 23; G 1; S 22; REs 12; % G/REs 8.3%
  - Financial and Fiduciary companies (FFCs): On-site inspections 11; G 6; S 5; REs 51; % G/REs 11.8%
  - Central Bank of San Marino (CBSM): REs 1; % G/REs 0.0%
  - Insurance companies (ICs): REs 2; % G/REs 0.0%
  - Postal offices (Pos): REs 10; % G/REs 0.0%
  - Collective investments companies (SGs): REs 2; % G/REs 0.0%
  - Insurance intermediaries (IIs): REs 44; % G/REs NA
  - Financial promoters (FPs): REs 3; % G/REs NA
  - Non financial institutions: On-site inspections 2; G 2.
  - Independent Legal Professionals: On-site inspections 3; G 3; REs 233; % G/REs 1.3%
  - Notaries and lawyers: On-site inspections 1; G 1; REs 113; % G/REs 0.9%
  - Accountants: On-site inspections 2; G 2; REs 120; % G/REs 1.7%
  - Total: On-site inspections 39; G 12; S 27; REs 233; % G/REs 5.2%
- Inspections carried out by the CBSM (as presented):
  - 2006: Banks 7106; Financial Institutions 7304; Total Inspections 219
  - 2007: Banks 6033; Financial Institutions 7016; Total Inspections 390
  - 2008: Banks 5113; Financial Institutions 9621; Total Inspections 474
  - 2009: Banks 7034; Financial Institutions 142111; Other 1100; Total Inspections NA

*Source: _cr10318 - 1.      The banking sector in San Marino is small in absolute terms but represents close*

### 1.      The banking sector in San Marino is small in absolute terms but represents close

### _cr10318 - 1.      The banking sector in San Marino is small in absolute terms but represents close

### Overview of the financial sector
- Total assets stood at €11.5 billion as of end-June 2009.
- The banking sector is "small in absolute terms but represents close to nine times of GDP."
- Commercial banks:
  - Total of 12 commercial banks.
  - Four are “historical” banks established at the end of the 19th century.
  - Two are majority foreign-owned.
  - San Marino’s banks attract deposits from Italy and lend or invest them in Italy; San Marino receives more funds than it can lend domestically.
- Nonbank financial sector:
  - Consists of two asset management companies, two recently licensed foreign life insurance companies, and over 50 fiduciary, leasing, factoring, and small consumer lending companies.
  - Assets and income of these companies have been growing rapidly during the past two years, but none is yet of significant size.
  - Fiduciary companies account for the majority of the nonbank financial sector, offering fee based services for holding customers assets in their own name, but providing little or no investment or wealth management advice.

### ML/TF risks and vulnerabilities
- Level of domestically-generated proceeds of serious crime in San Marino is low.
- Vulnerability:
  - San Marino is vulnerable to money laundering (ML) of proceeds of crimes committed abroad (mostly in Italy).
  - In the past, proceeds were predominantly generated from tax evasion.
  - Statistics for 2008-2009 on domestic ML investigations or MLA requests indicate proceeds that could have been laundered in San Marino are also generated from other predicate offences, including drug trafficking, mafia-type criminal organizations, illegal banking activities, fraudulent bankruptcy, and fraud.
- Risk of terrorist financing (TF) is low.
- Features creating a favorable environment to ML (historical context):
  - Strict financial secrecy.
  - Availability of fiduciary services or corporate ownership arrangements intended to systematically hide beneficial ownership.
  - Financial instruments facilitating anonymity and easy transferability (such as bearer passbooks or bearer certificates of deposits).
  - Predominant use of cash and negotiation of large volumes of checks with multiple endorsements and illegible signatures.
  - Widespread granting by Sammarinese financial institutions of collaterals (“fideiussioni”) on loans issued by Italian or foreign banks is also said to have facilitated ML activities.
- Enforcement matters:
  - San Marino’s largest bank and its subsidiary fiduciary company are currently under criminal investigation for charges of ML and criminal association, among others.

### Recent developments in AML/CFT (timeline and measures)
- MONEYVAL MER adopted in April 2008; on-site visit took place in March 2007.
- After the MER, San Marino was placed under enhanced scrutiny (“compliance enhancing procedure”).
- Key legislation and measures:
  - AML/CFT law no. 92/2008 (modified by Law no. 73/2009 in the part concerning sanctioning for non compliance with preventive measures) passed on June 17, 2008.
    - Prohibits anonymous accounts.
    - Establishes a full range of CDD obligations (including the obligation to identify and verify the beneficial owner).
    - Introduces a risk-based approach to CDD and record keeping requirements.
    - Establishes the Financial Intelligence Agency (FIA) as an autonomous agency within the Central Bank of San Marino (CBSM), operationally independent in implementation of the FIU’s core functions.
  - Delegated Decree no. 135/2008 (modified by Delegated Decree no. 146/2008) further details FIA responsibilities.
  - FIA issued binding “instructions” complementary to the AML/CFT law.
  - Other measures adopted:
    - Law no. 100/2009: new regime for the transfer of bearer shares.
    - Law no. 104/2009: adoption of a law on rogatory letters.
    - Delegated Decree no. 74/2009: introduction of a declaration system for cross-border physical transportation of cash and bearer financial instruments.
    - Congress of State Decision no. 2, 2008 and subsequent amendments: measures to fight terrorism pursuant to UNSC Resolutions 1267 and 1373.
    - Law no. 98/2009: adoption of a law on special investigative techniques (wire tapping).
    - Law decree on September 22, 2009: prohibited issuance of new bearer passbooks (BP) and phased out existing ones by June 30, 2010; from that date all BPs, regardless of the balance, must be converted into nominal ones; no withdrawals/deposits can be done on existing passbooks from the date of its entry into force.
    - Law decree (November 8, 2009), ratified by Congress on January 19, 2010: prohibited issuing of certificates of deposits in bearer form and required that reimbursement of existing bearer certificates in circulation be reported to the AML/CFT compliance officer for amounts exceeding EUR 15,000.
- Bank secrecy and information sharing measures:
  - Article 86 of the AML/CFT law amended Article 36 of the Law on Companies and Banking, Financial and Insurance Services (LCBFI) so bank secrecy cannot be invoked for AML/CFT-related requests by supervisory authorities and the FIA.
  - CBSM Interpretative Note (CBSM Recommendation No.2009-01): clarifies that provision of client information to other Italian/European financial institutions to fulfill AML/CFT obligations does not constitute a breach of bank secrecy.
  - FIA Instruction No.2009-02: requires financial institutions to provide to their foreign counterparts the information required to fulfil the latter’s CDD and AML/CFT requirements.
  - Law Decree No.65 of May 14 2009: establishes a database maintained by the CBSM to facilitate interbank transmission of data on customers and beneficial owners between Sammarinese and Italian banks; followed by CBSM Regulation No.2009-03 implementing the data transmission.
  - Congress passed further banking secrecy amendments on January 21, 2010; the law now specifically provides that financial secrecy cannot be opposed to the penal judicial authority, governmental bodies responsible for the exchange of information with foreign counterparts for the execution of international treaties, the CBRSM and the FIA.
- International cooperation:
  - In 2008, San Marino granted mutual legal assistance (MLA) in eight cases out of eight requests received relating to ML.
  - From January 1 to July 31, 2009, nine out of nine such requests were granted.
  - INTERNATIONAL exchange by FIA with foreign counterparts has increased.

### Institutional capacity, supervision, and effectiveness
- FIA established and became operational; responsibilities include receiving, analyzing, and disseminating suspicious transactions to the judiciary.
- Human resource constraints:
  - Human resources are limited at the FIA, the Supervision Department of the CBSM, and the judiciary.
  - Judiciary: currently only one investigative judge and two aides responsible for ML investigations and handling an increasing number of MLA requests.
- Inspections and supervision:
  - AML/CFT inspections increased, especially during 2008-2009 when the FIA became operational.
  - Given poor historical implementation of AML/CFT by financial institutions and limited human resources, AML/CFT supervision should be considerably strengthened.
  - CBSM and FIA have signed a Memorandum of Understanding (MOU) on supervision; a more structured and risk-based planned approach combining CBSM and FIA synergies could remedy human resource issues in the short period.
- MONEYVAL developments:
  - MONEYVAL lifted the compliance enhancing procedure in September 2009, acknowledging progress.
  - An on-site visit of San Marino is planned for September 2010 as part of MONEYVAL’s fourth round of mutual evaluations.

### Legal shortcomings and recommendations
- General assessment:
  - AML/CFT law and FIA regulations are clearly written to match international standards and constitute significant improvement over 1998 requirements, but shortcomings remain that should be addressed to ensure full consistency with FATF Recommendations.
- Specific legal shortcomings:
  - Articles 36 and 103 of the LCBFI establish strict requirements that hamper broad sharing of information envisaged by FATF Recommendation 4.
  - Disclosure of confidential information to a foreign authority is prohibited without a formal agreement and written permission of the CBSM before further disclosure by the recipient; requirement that foreign confidentiality provisions be “equivalent” to San Marino is burdensome.
  - Interpretative note does not clearly override primary law; foreign-owned banks report they do not provide confidential customer information to their parent companies nor permit head office internal audit or compliance staff access to files.
  - FATF Recommendation 6 on Politically Exposed Persons (PEP): AML/CFT Law limits requirement for senior management approval to establishment of the business relationship only, not to cases where a customer becomes a PEP after acceptance.
  - Article 26 (simplified due diligence) relieves financial institutions of requirements beyond determining if the entity/product meets simplified due diligence criteria.
  - Article 23 permits starting a business relationship before completion of due diligence without requiring management of resulting risks (e.g., transaction restrictions).
  - Article 6 of FIA Instruction 2009/03 allows periodic monitoring intervals (once every two years for “limited risk customers”, once every year for “low risk customers”, once every six months for “medium risk customers”) instead of continuous monitoring, contradicting Article 22, para. 1 d) of the AML/CFT law which requires ongoing monitoring.
  - No comprehensive requirements for adequate screening procedures for employees; screening is limited to corporate officers and the general requirement that staff be suitably qualified.
- Explicit recommendations from the source:
  - It is recommended that authorities remove the requirement that the confidentiality provisions of a foreign authority be “equivalent” to those of the CBSM and substitute the requirement that the confidentiality arrangements should be “adequate” for the protection of the information concerned, according to the judgment of the CBSM.
  - It is recommended that authorities change the LCBFI, so as to allow foreign owned banks to share information currently subject to bank secrecy to its parent bank and home state supervisor and to specifically allow the bank-to-bank sharing of information for AML/CFT.
  - It is recommended that authorities require financial institutions to obtain senior management approval to continue the business relationship also when the customer or beneficial owner is subsequently found to be, or subsequently becomes a PEP.

### Key statistics and enforcement points (preserved figures)
- €11.5 billion — total assets as of end-June 2009.
- close to nine times of GDP — size of banking sector relative to GDP.
- 12 — total number of commercial banks.
- four — number of “historical” banks established at the end of the 19th century.
- two — number of majority foreign-owned banks.
- two — asset management companies in nonbank sector.
- two — recently licensed foreign life insurance companies in nonbank sector.
- over 50 — fiduciary, leasing, factoring, and small consumer lending companies in nonbank sector.
- 2008-2009 — period referenced for ML investigations and MLA statistics.
- April 2008 — adoption of the MONEYVAL Mutual Evaluation Report (MER).
- June 17, 2008 — passage of AML/CFT law no. 92/2008.
- Law no. 73/2009 — modification concerning sanctioning for non compliance with preventive measures.
- Delegated Decree no. 135/2008 (modified by Delegated Decree no. 146/2008) — detailing FIA responsibilities.
- Law no. 100/2009 — new regime for transfer of bearer shares.
- Law no. 104/2009 — law on rogatory letters.
- Delegated Decree no. 74/2009 — cross-border cash and bearer instrument declaration system.
- Law no. 98/2009 — special investigative techniques (wire tapping).
- September 22, 2009 — decree prohibiting issuance of new bearer passbooks and phasing out by June 30, 2010.
- November 8, 2009 (ratified January 19, 2010) — decree prohibiting issuing of certificates of deposits in bearer form and reporting requirements for reimbursements exceeding EUR 15,000.
- Article 86 of the AML/CFT law — amendment to Article 36 of the LCBFI regarding bank secrecy for AML/CFT.
- CBSM Recommendation No.2009-01 — interpretative note on Article 36.
- FIA Instruction No.2009-02 — requires provision of information to foreign counterparts for CDD/AML/CFT.
- Law Decree No.65 of May 14 2009 and CBSM Regulation No.2009-03 — interbank data transmission between San Marino and Italy.
- September 2009 — MONEYVAL lifted the compliance enhancing procedure.
- September 2010 — planned on-site visit by MONEYVAL as part of the fourth round of mutual evaluations.

*Source: _cr10318 - 1.      The banking sector in San Marino is small in absolute terms but represents close*

### 21.      It is recommended

### 21.      It is recommended

### STRs and reporting trends
- In 2007, 44 STRs were reported (39 of which by banks).
- In 2008, 110 STRs were reported (79 of which by banks).
- From January 1-November 6, 2009 the FIA received 190 STRs (out of which 140 by banks).
- STRs were also filed in case of attempted transactions.
- Suspicious Transaction Reports received by FIA: Total 190; Reporting Entities (REs) 41; Total of Reporting Entities (TREs) 233; 17.6%.

- Breakdown in the FIA table (as presented in source):
  - Financial parties: 166 STRs; 28 REs.
  - Commercial Banks (CBs): 140 STRs; 10 REs; 12 TREs; 83.3% REs/TREs.
  - Financial and Fiduciary Companies (FFCs): 22 STRs; 15 REs; 51 TREs; 29.4% REs/TREs.
  - Central Bank of San Marino (CBSM): 2 STRs; 1 RE; 1 TRE; 100.0% REs/TREs.
  - Insurance Companies (ICs): - STRs; - REs; 2 TREs; 0.0% REs/TREs.
  - Post Offices (Pos): 2 STRs; 2 REs; 10 TREs; 20.0% REs/TREs.
  - Collective Investments Companies (SGs): - STRs; - REs; 2 TREs; 0.0% REs/TREs.
  - Insurance Intermediaries (IIs): - STRs; - REs; 44 TREs; 0.0% REs/TREs.
  - Financial Promoters (FPs): - STRs; - REs; 3 TREs; (not available) NA.
  - Non financial parties: - STRs; - REs.
  - Professionals: 12 STRs; 9 REs; 233 TREs; 3.9% REs/TREs.
  - Notaries and Lawyers: 3 STRs; 3 REs; 113 TREs; 2.7% REs/TREs.
  - Accountants: 9 STRs; 6 REs; 120 TREs; 5.0% REs/TREs.
  - Others: 12 STRs; 4 REs; NA TREs; NA %.
  - Total: 190 STRs; 41 REs; 233 TREs; 17.6% REs/TREs.

### Implementation of AML/CFT requirements and CDD challenges
- Prior to 2008, AML requirements existed since 1999 but were not actively enforced; few detailed instructions and no inspections were conducted.
- Many banks’ and financial institutions’ customer relationships were established before current requirements came into effect and often involved abnormally large use of cash or other instruments that facilitated anonymity.
- Resulting risks: beneficial owner may not be truly known; funds involved may be proceeds of some form of financial crime (including tax evasion when it does not involve fraudulent means, per source note).
- Key elements identified as critical:
  - Verification of customer identity and the source of funds or income.
  - Risk-based profiling of clients.
  - Thorough ongoing monitoring of already established business relations.
- Effective CDD and ready availability of comprehensive client information are essential for financial institutions’ compliance and for authorities’ financial analysis, criminal investigations, and supervision.
- Particular relevance to San Marino because customers are mostly non-residents and client information, if not maintained locally, is accessible only via international cooperation.

### Progress and gaps in risk-profiling and monitoring
- Five banks visited adopted internal regulations/procedures between May and November 2009; three FFCs met—only one provided internal procedures.
- CDD law and FIA instruction No. 3 of 2009 require classifying clients into four risk categories using criteria from Article 25 of the AML/CFT law (type of customer, main business activity, customer behavior, place of residence; type of business relationship; for occasional transactions: type and execution mode, amount, frequency, coherency, geographical area).
- Deadlines:
  - Risk-profiling obligation in force for customers accepted after June 1, 2009.
  - Deadline for existing customers set for December 1, 2009.
- Examples of implementation status reported by banks visited:
  - Some banks had performed risk profiling for 75% of their clients.
  - Others had performed risk profiling for only 15% of their clients.
  - One fiduciary firm of the three visited was not aware of the obligation to risk-profile customers.
- Use of profiling software:
  - Some banks use software reliant on internal databases.
  - Databases are non-uniform across institutions.
  - Proposed FIA-required software (GIANOS) presupposes uniform classifications and codes which have not yet been undertaken.
  - Risk that many existing customers will not be subject to appropriate risk profiling due to lack of historical classified data and incomplete customer information, especially among fiduciary firms.
- Few financial institutions systematically contact customers to update information; majority request updates “at the first opportunity” (often when customer visits to transact), leaving many customers without up-to-date information.
- Fiduciary clients often refuse contact for confidentiality reasons, complicating updates.

### Fiduciaries and ML vulnerabilities
- FFCs offering fiduciary services are vulnerable to ML activities and considerably weaken the AML/CFT regime.
  - Majority of ongoing ML investigations and MLA requests related to ML involve fiduciary accounts maintained by FFCs.
- Vulnerabilities derive from gaps in legal framework, poor internal AML/CFT policies/procedures, and typical services offered by fiduciaries.
- Legal/regulatory framework of finance and fiduciary sector remains fragmented and weak compared with banking, insurance, and securities sectors.
- Issues observed:
  - Lack of transparency in ownership of FFCs; need to enhance mechanisms.
  - Lack of clarity on scope of activities fiduciary companies can engage in.
  - Some fiduciaries had not completed client risk profiling; unclear availability of client information introduced by third parties.
  - Fiduciary companies often act as a “shield,” maintaining omnibus accounts that commingle funds from multiple fiduciary relationships, hindering detection of suspicious transactions by banks.
  - Fiduciaries have accepted abnormally large cash deposits and negotiated/cashed large volumes of multiple-endorsed checks with illegible or fictitious signatures.
  - Fiduciaries may lack adequate client information, yet can be relied upon for identification of customers by other financial institutions.
  - Financial institutions can apply simplified due diligence for bank accounts opened by a fiduciary company to manage funds on behalf of clients, a practice identified as worrisome.
- The number of FFCs filing STRs remains low compared to the overall number of fiduciary firms; fiduciaries visited by the mission had never filed an STR.

### Recommendations (FIA, banks, supervisory actions)
- Authorities should address noted shortcomings; FIA could issue instructions and modify Instruction 2009/03 to clarify that specified timeframes are only “at a minimum” and do not exclude the financial institutions’ obligation to conduct ongoing monitoring of the business relationship.
- The FIA should provide guidance to banks to determine which legacy customers should be regarded as high risk. Suggested clarifications (as examples in source):
  - Treat any customer who has made a deposit of more than a threshold set by the FIA in cash or multiple endorsed checks with a cumulative high value as high risk; Article 27 consequences should apply.
  - High-risk customers should be subject to enhanced due diligence including additional and independent verification of ownership and of funds (independent of the depositor and the original introducer).
  - Maintain satisfactory evidence on file showing why large quantities of cash were consistent with the customer’s legitimate business purpose.
  - Banks asked by a fiduciary to undertake a transaction for a customer they do not know should ask whether this is a high-risk customer and, if so, insist on seeing the fiduciary’s CDD information to verify proper verification, justification for cash/endorsed checks, and known source of funds.
  - Where requirements are unmet or information is refused, banks should consider submitting an STR and refuse to undertake the transaction.
- Specific recommendations directed at authorities regarding fiduciary firms:
  - Conduct on-site visits to all FFCs to check compliance with AML/CFT requirements.
  - Prohibit omnibus accounts for the management of FFCs’ customers where funds are commingled.
  - Where a single account is maintained within a bank for an FFC, require that each fiduciary customer be specified in a separate sub-account (already practice for some FFCs).
  - Prohibit a financial institution from relying on a fiduciary for CDD purposes, or introduce a requirement that the bank must first satisfy itself as to the adequacy of the fiduciaries’ CDD procedures before relying on CDD carried out by the fiduciary.
  - Prohibit fiduciaries from negotiating checks.
  - Prohibit (or temporarily suspend) the application of simplified CDD by financial institutions for accounts or other relationships maintained with fiduciary firms.

### The Financial Intelligence Agency (FIA) capacity and independence
- The FIA is the FIU of San Marino, responsible for receiving, analyzing, and disseminating to the judiciary cases of suspected ML/TF.
- Pursuant to the AML/CFT law the FIA is an autonomous agency established within the CBSM and does not have a separate legal personality from the CBSM.
- The FIA also conducts inspections on reporting entities’ compliance, acts as “judiciary police” on behalf of the investigating judge upon delegation, and has other AML/CFT functions.
- The FIA appears to have sufficient operational independence:
  - The legal framework vests the core functions (reception, analysis, dissemination of STRs) in the FIA and provides that these functions be exercised “in complete autonomy and independence” (Articles 2 and 4 of the AML/CFT law; Article 14 of the delegated decree).
  - Article 7 of the delegated decree states the Director shall plan, manage and control the agency’s activity in full autonomy.
- Appointment and dismissal procedures for the FIA Director:
  - Director appointed by the Congress of State (upon proposal of the Committee for Credit and Savings-CCS); CBSM has only a consultative role.
  - Director must possess “requisites of professionalism, independence and respectabilities” (substantially defined by delegated decree, Articles 2-7).
  - Director can be removed if conditions for appointment are no longer satisfied or if found “guilty of serious deficiencies.”
- Staffing constraint:
  - FIA currently has a staff of 10 (two more positions need to be filled), which is not enough to properly undertake its full range of functions.
  - In addition to core FIU functions, FIA is responsible for rule-making, inspections of reporting entities’ compliance, training law enforcement authorities, and acting as “judicial police” when delegated by the judiciary.

*Source: _cr10318 - 21.      It is recommended*

### 40.      The responsibility for determining the staffing plan of the FIA (“pianta organica”) is

### _cr10318 - 40.      The responsibility for determining the staffing plan of the FIA (“pianta organica”) is

### Staffing authority and responsibilities
- The director is vested with responsibility for determining the staffing plan of the FIA (“pianta organica”) by Article 7, para. 3 of the delegated decree.
- Director proposes the “pianta organica” to the CCS; the CCS, having heard the Governing Council of the CBSM (GCCB), approves the proposal after determining that the proposed personnel structure “meets the criteria of economy, proportionality, efficiency, and effectiveness”.
- Article 7, para. 4: the director is responsible for proposing to the GCCB the recruitment of staff and the annual performance review of the FIA’s staff for promotions.
- The delegated decree is not explicit on who has responsibility for dismissing staff; FIA clarified that the rules envisaged by the contracts in place with the CBSM staff would apply.

### Hiring arrangements and operational independence
- FIA staff is hired according to procedures and through contracts with the CBSM (article 8, para. 1 of the delegated decree), reflecting FIA being established within the CBSM.
- Article 8, para. 2: staff “must be selected in such manner as to guarantee the complete independence of the agency”.
- Staff (including seconded staff from other ministries or agencies) can benefit from the same contractual conditions and salary of the CBSM; this can strengthen operational independence and autonomy.

### Staffing numbers, phased approach, and recommendation
- FIA determined number of staff set at 12 for the first 2 years of operation, following a phased approach taking into account start up and a test period of two years, after which staff numbers will be re-assessed.
- Recommendation:
  - The FIA conduct an assessment of the need of additional staff ahead of the two-year period, given the likely increase in workload as implementation of AML/CFT requirements by reporting entities increases.

### Non-core functions and resource burden
- Law allows the FIA to act as “judicial police” upon delegation by the judiciary in investigations related to ML/TF or non compliance with AML/CFT law (Article 5, para. 4).
- Activities such as interrogations of suspects or witnesses have proven burdensome given limited human resources and increased number of MLA requests; the utility of this function for ML/TF investigations is unclear.
- Training law enforcement authorities on AML/CFT could also be burdensome for the FIA.
- Recommendation implicit in assessment:
  - The FIA needs to reconsider the utility of certain non-core functions assigned by law, especially given limited human resources.

### Magistrates, MLA and short-term measures
- Very limited number of magistrates assigned to ML/TF investigations and to deal with MLA requests related to ML/TF.
- Short-term response options:
  - Increase the number of magistrates involved in ML/TF, eventually considering establishment of a dedicated pool of magistrates responsible for investigations of financial crimes, rather than relying on FIA officers to compensate judiciary resource gaps.

### FIA operational progress and STR handling
- FIA operational since November 2008.
- Achievements:
  - Established procedure for receipt of STRs in electronic format.
  - Set up an internal database.
  - Conducted a survey among financial institutions to determine compliance with new AML/CFT requirements to inform priorities and inspection plan.
  - Drafted an inspection manual and conducted inspections of reporting entities, including checks on bearer passbooks (BPs).
- Positive trend: increase of STRs sent to the FIA by financial institutions and DNFBPs.
- FIA is properly equipped to conduct financial analysis (considering enhancing current software).
- Observation: number of STRs that after FIA analysis resulted in judicial cases is low.

### Access to foreign information and international cooperation
- Issue: access to information held in other countries (especially Italy) needed for financial analysis or criminal investigations for ML/TF cases.
- FIA and other law enforcement have proper access to Sammarinese governmental and commercial databases.
- Majority of financial institutions’ customers are non-residents (in the case of the fiduciary companies 99% ) and majority of cases involve Italian residents.
- Recommendation:
  - FIA and law enforcement agencies seek closer cooperation with the Italian institutions responsible for AML/CFT with a view to concluding MOUs.

### Case processing distribution (as presented)
- In process 42,9%
- Closed 53.8%
- Court 3.2%
- FIUs 8.3%
- Police Forces 10.9%
- FIA 22.4%
- Others 1.3%

### Inspections: FIA activity (2009) — breakdown and coverage
- Period: From January 1 to November 6, 2009.
- Inspections carried out by the FIA: On-site inspections total 39; General inspections (G) 12; Specific inspections (S) 27; Reporting entities (REs) 233; Overall % G/REs 5.2%
- Detailed table entries (as presented):
  - Financial institutions: On-site inspections 34; General inspections (G) 7; Specific inspections (S) 27
  - Commercial Banks (CBs): On-site inspections 23; General inspections (G) 1; Specific inspections (S) 22; Reporting entities (REs) 12; % G/REs 8.3%
  - Financial and Fiduciary companies (FFCs): On-site inspections 11; General inspections (G) 6; Specific inspections (S) 5; Reporting entities (REs) 51; % G/REs 11.8%
  - Central Bank of San Marino (CBSM): On-site inspections -; General inspections (G) -; Specific inspections (S) -; Reporting entities (REs) 1; % G/REs 0.0%
  - Insurance companies (ICs): On-site inspections -; General inspections (G) -; Specific inspections (S) -; Reporting entities (REs) 2; % G/REs 0.0%
  - Postal offices (POs): On-site inspections -; General inspections (G) -; Specific inspections (S) -; Reporting entities (REs) 10; % G/REs 0.0%
  - Collective investments companies (SGs): On-site inspections -; General inspections (G) -; Specific inspections (S) -; Reporting entities (REs) 2; % G/REs 0.0%
  - Insurance intermediaries (IIs): On-site inspections -; General inspections (G) -; Specific inspections (S) -; Reporting entities (REs) 44; % G/REs NA
  - Financial promoters (FPs): On-site inspections -; General inspections (G) -; Specific inspections (S) -; Reporting entities (REs) 3; % G/REs NA
  - Non financial institutions: On-site inspections 2; General inspections (G) 2; Specific inspections (S) -; Reporting entities (REs) -; % G/REs -
  - Independent Legal Professionals: On-site inspections 3; General inspections (G) 3; Specific inspections (S) -; Reporting entities (REs) 233; % G/REs 1.3%
  - Notaries and lawyers: On-site inspections 1; General inspections (G) 1; Specific inspections (S) -; Reporting entities (REs) 113; % G/REs 0.9%
  - Accountants: On-site inspections 2; General inspections (G) 2; Specific inspections (S) -; Reporting entities (REs) 120; % G/REs 1.7%
  - Total: On-site inspections 39; General inspections (G) 12; Specific inspections (S) 27; Reporting entities (REs) 233; % G/REs 5.2%

### Coordination between FIA and CBSM; recommendations
- Legal responsibilities:
  - AML/CFT law gives primary responsibility for supervision of obligations on financial institutions to the FIA.
  - CBSM has general responsibility for supervising banks and other financial institutions and considers AML/CFT implementation part of that role.
- Current practice:
  - MOU exists between FIA and CBSM, but cooperation has been limited in practice to informing each other of violations.
  - FIA and CBSM do not share their inspection programs with each other.
- Recommendations:
  - FIA and CBSM should coordinate supervisory activities and discuss how to enhance effectiveness through a jointly planned risk-based program to maximize coverage and enforcement effectiveness.
  - Allocate additional human resources for monitoring compliance with AML/CFT obligations.

### Inspections carried out by the CBSM (as presented)
- Table entries (as presented):
  - Year 2006: Banks 7106; Financial Institutions 7304; Total Inspections 219
  - Year 2007: Banks 6033; Financial Institutions 7016; Total Inspections 390
  - Year 2008: Banks 5113; Financial Institutions 9621; Total Inspections 474
  - Year 2009: Banks 7034; Financial Institutions 142111; Other 1100; Total Inspections NA
- Source: Central Bank

*Source: _cr10318 (excerpts from the IMF staff report PDF).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10318.pdf_