Anti-Money Laundering & Counter-Terrorist Financing Measures in Lao PDR 2023 Mutual Evaluation Report PDF

Anti-money laundering and counter-terrorist financing measures Lao PDR Mutual Evaluation Report August 2023 The Asia/Pacific Group on Money Laundering (APG) is an inter-governmental organisation consisting of 42 members in the Asia-Pacific region, as well as organisations, and observers from outside the region. Under Article 1 of the APG Terms of Reference 2019, the APG is a non-political, technical body, whose members are committed to the effective implementation and enforcement of the internationally accepted standards against money laundering, financing of terrorism and proliferation financing set by the Financial Action Task Force. This document, any expression herein, and/or any map included herein, are without prejudice to the status of, or sovereignty over, any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Under the APG Terms of Reference, membership in the APG is open to jurisdictions which have a presence in the Asia-Pacific region. For more information about the APG, please visit the website: www.apgml.org This report was adopted by the APG membership in July 2023 and contains a summary of the anti‐ money laundering (AML)/counter‐terrorist financing (CTF) measures in place in Lao PDR as at September 2022. Citing reference: APG 2023, Anti-money laundering and counter-terrorist financing measures – Lao PDR, Third Round Mutual Evaluation Report, APG, Sydney https://apgml.org/members-and-observers/members/member-documents.aspx?m=a6c4a803-0e15- 4a43-b03a-700b2a211d2e © August 2023 APG No reproduction or translation of this publication may be made without prior written permission. Applications for permission to reproduce all or part of this publication should be made to: APG Secretariat Locked Bag A3000 Sydney South New South Wales 1232 AUSTRALIA Tel: +61 2 5126 9110 E mail: [email protected] Web: www.apgml.org Cover image: Pha That Luang, Vientiane, Lao PDR TABLE OF CONTENTS Exe............................................................................................................................................................... 3 Key Findings............................................................................................................................................... 4 Risks and General Situation....................................................................................................................... 5 Overall Level of Effectiveness and Technical Compliance...................................................................... 6 Priority Actions......................................................................................................................................... 10 Effectiveness & Technical Compliance Ratings...................................................................................... 12 MUTUAL EVALUATION REPORT OF LAO PDR...................................................................................... 13 Preface....................................................................................................................................................... 13 CHAPTER 1. ML/TF RISKS AND CONTEXT......................................................................................... 14 ML/TF Risks and Scoping of Higher-Risk Issues................................................................................... 16 Materiality................................................................................................................................................. 19 Structural Elements................................................................................................................................. 21 Background and other Contextual Factors............................................................................................. 23 CHAPTER 2. NATIONAL AML/CFT POLICIES AND COORDINATION............................................... 31 Key Findings and Recommended Actions.............................................................................................. 31 Immediate Outcome 1 (Risk, Policy and Coordination)........................................................................ 32 CHAPTER 3. LEGAL SYSTEM AND OPERATIONAL ISSUES............................................................... 42 Key Findings and Recommended Actions.............................................................................................. 42 Immediate Outcome 6 (Financial intelligence ML/TF)......................................................................... 46 Immediate Outcome 7 (ML investigation and prosecution)................................................................. 54 Immediate Outcome 8 (Confiscation)..................................................................................................... 62 CHAPTER 4. TERRORIST FINANCING AND FINANCING OF PROLIFERATION................................ 69 Key Findings and Recommended Actions.............................................................................................. 69 Immediate Outcome 9 (TF investigation and prosecution).................................................................. 73 Immediate Outcome 10 (TF preventive measures and financial sanctions)....................................... 77 Immediate Outcome 11 (PF financial sanctions)................................................................................... 83 CHAPTER 5. PREVENTIVE MEASURES............................................................................................... 86 Key Findings and Recommended Actions.............................................................................................. 86 Immediate Outcome 4 (Preventive Measures)...................................................................................... 87 CHAPTER 6. SUPERVISION.................................................................................................................. 96 Key Findings and Recommended Actions.............................................................................................. 96 Immediate Outcome 3 (Supervision)...................................................................................................... 98 CHAPTER 7. LEGAL PERSONS AND ARRANGEMENTS.................................................................... 109 Key Findings and Recommended Actions............................................................................................ 109 Immediate Outcome 5 (Legal Persons and Arrangements)................................................................ 110 CHAPTER 8. INTERNATIONAL COOPERATION............................................................................... 118 Key Findings and Recommended Actions............................................................................................ 118 Immediate Outcome 2 (International Cooperation)........................................................................... 119 TECHNICAL COMPLIANCE ANNEX....................................................................................................... 129 Recommendation 1 – Assessing Risks and applying a Risk-Based Approach................................... 129 Recommendation 2 – National Cooperation and Coordination.......................................................... 131 Recommendation 3 – Money laundering offence................................................................................ 132 Recommendation 4 – Confiscation and provisional measures........................................................... 136 Recommendation 5 – Terrorist financing offence............................................................................... 139 Recommendation 6 – Targeted financial sanctions related to terrorism and terrorist financing... 142 Recommendation 7 – Targeted Financial sanctions related to proliferation.................................... 147 Recommendation 8 – Non-profit organisations.................................................................................. 150 2 Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 Recommendation 9 – Financial institution secrecy laws.................................................................... 154 Recommendation 10 – Customer due diligence.................................................................................. 155 Recommendation 11 – Record-keeping............................................................................................... 162 Recommendation 12 – Politically exposed persons............................................................................ 163 Recommendation 13 – Correspondent banking.................................................................................. 165 Recommendation 14 – Money or value transfer services................................................................... 166 Recommendation 15 – New technologies............................................................................................ 167 Recommendation 16 – Wire transfers.................................................................................................. 171 Recommendation 17 – Reliance on third parties................................................................................ 174 Recommendation 18 – Internal controls and foreign branches and subsidiaries............................ 174 Recommendation 19 – Higher-risk countries...................................................................................... 175 Recommendation 20 – Reporting of suspicious transaction.............................................................. 176 Recommendation 21 – Tipping-off and confidentiality...................................................................... 177 Recommendation 22 – DNFBPs: Customer due diligence.................................................................. 178 Recommendation 23 – DNFBPs: Other measures............................................................................... 180 Recommendation 24 – Transparency and beneficial ownership of legal persons........................... 181 Recommendation 25 – Transparency and beneficial ownership of legal arrangements................. 190 Recommendation 26 – Regulation and supervision of financial institutions.................................... 194 Recommendation 27 – Powers of supervisors.................................................................................... 197 Recommendation 28 – Regulation and supervision of DNFBPs......................................................... 198 Recommendation 29 – Financial intelligence units............................................................................. 200 Recommendation 30 – Responsibilities of law enforcement and investigative authorities............ 205 Recommendation 31 – Powers of law enforcement and investigative authorities.......................... 207 Recommendation 32 – Cash Couriers................................................................................................... 209 Recommendation 33 – Statistics........................................................................................................... 211 Recommendation 34 – Guidance and feedback................................................................................... 212 Recommendation 35 – Sanctions.......................................................................................................... 213 Recommendation 36 – International instruments.............................................................................. 214 Recommendation 37 – Mutual legal assistance................................................................................... 215 Recommendation 38 – Mutual legal assistance: freezing and confiscation....................................... 218 Recommendation 39 – Extradition....................................................................................................... 220 Recommendation 40 – Other forms of international cooperation..................................................... 221 Attachment to the TC Annex: Summary of Technical Compliance – Key Deficiencies..................... 228 Annex A: Glossary of Relevant Legal Instruments............................................................................... 240 Annex B: Glossary of Abbreviations...................................................................................................... 243 EXE 3 Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 EXECUTIVE SUMMARY EXECUTIVE SUMMARY 1. This report provides a summary of the anti money laundering and counter terrorist financing (AML/CFT) measures in place in Lao PDR as at 23 September 2022. It analyses the level of compliance with the FATF 40 Recommendations and the level of effectiveness of Lao PDR’s AML/CFT system, and provides recommendations on how the system could be strengthened. Key Findings a. As reflected in the national risk assessment (NRA), there are significant gaps in the assessment and understanding of national and sectoral ML/TF risks (casinos, real estate, banks, transnational organised crime, corruption, environmental crime, human trafficking, etc.) and cross-border risks. There are also significant gaps in the assessment of non-profit organisations (NPOs) at risk of TF. Lao PDR authorities have low levels of risk understanding across all sectors. There is an absence of a cohesive and coordinated policy, regulatory and enforcement efforts to identify and mitigate identified ML/TF risks. b. The virtual asset (VA) service providers (VASPs) risk assessment (2022) had no clear methodology and did not consider the NRA findings, the ML/TF risk posed by the safekeeping or administration of VAs, or the risks posed by different types of VA activities. The assessment also did not quantify the size of Lao PDR’s cryptocurrency market, identify relevant ML/TF typologies, nor did it include information from relevant public and private sector stakeholders. c. National and agency-level policies and prioritisation, including resource allocation do not sufficiently focus on key risks. d. There are challenges in the development and use of financial intelligence by the Anti-Money Laundering Intelligence Office (AMLIO) and law enforcement agencies (LEAs) to better support investigations of predicate crimes, ML, TF and asset tracing. e. Lao PDR has not sufficiently prioritised ML investigations, prosecutions and asset confiscation with a focus on ML associated with key risks - domestic and cross-border going beyond the NRA findings to include ML associated with corruption, large-scale transnational drug trafficking, human trafficking, etc. 4 EXECUTIVE SUMMARY f. Lao PDR lacks clear mechanisms to effectively implement targeted financial sanctions (TFS) obligations. This includes a lack of guidance to the private sector or prompt communication of updates made to the UN sanctions lists in order. g. There are significant deficiencies in the ML offence and in the regulatory preventive measures including for customer due diligence (CDD), ongoing monitoring, enhanced/specific measures, politically exposed persons (PEPs), correspondent banking, new technologies (including requirements on VASPs), wire transfer rules, internal controls and TFS. h. There are significant weakness in the implementation of risk-based AML/CFT measures for DNFBPs, including most importantly casinos, real estate agents, and dealers in precious metals and stones (DPMS). i. Lao PDR has commenced some aspects of AML/CFT supervision in the banking sector. However, there is a need to significantly enhance the frequency, depth and focus of that supervision. There is a lack of supervision, guidance and outreach of other parts of the financial sector as well as for DNFBPs and NPOs including the high risk casino sector, real estate sector, and DPMS. j. Lao PDR has not used the full range of sanctions available to promote compliance to AML/CFT regulations, in particular for high-risk REs such as banks and casinos. k. Lao PDR has not implemented sufficient measures to ensure that accurate and up-to-date beneficial ownership information in relation to legal persons and legal arrangements is obtained and is available to competent authorities in a timely manner. Inconsistent and non- compliant statutory definitions of the term ‘beneficial owner’ creates stumbling blocks to the collection of accurate information. l. Lao PDR has not sufficiently prioritised and pursued formal and informal international cooperation to support ML and TF investigations (including predicate offence investigations), asset tracing, prosecutions and reporting entity supervision, particularly for high-risk crime types and in high risk sectors (notably the casino sector, but also the banking and real estate sectors). Risks and General Situation 2. Lao PDR faces significant domestic and transnational risks from profit-driven crime. It has geographic proximity to higher ML/TF risk jurisdictions in the ASEAN region that exposes it to foreign illicit financial flows which, in turn, creates internal ML/TF vulnerabilities and risks. Lao PDR is not a regional financial centre and has lower risks of being used as a destination for criminal proceeds compared to some of its neighbouring countries. Nevertheless, Lao PDR is at risk of exploitation as a transit location for criminal proceeds. 3. While Lao PDR does not appear to face significant threats from regional or international terrorism or terrorist financing, major vulnerabilities in its financial and non-financial sectors, porous borders, and generally weak AML/CFT control systems, increase its TF risks. 5 Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 EXECUTIVE SUMMARY Overall Level of Effectiveness and Technical Compliance 4. Since its last assessment in 2010, Lao PDR’s AML/CFT regime has undergone some institutional reforms. However, there remain major gaps and deficiencies in its legal and institutional framework, including fundamental flaws in its ML and TF offences, its STR reporting regime, and the CDD information-collection obligations on reporting entities (REs). Other technical compliance weaknesses add to systemic vulnerabilities and raise significant risk concerns. 5. In terms of effectiveness, Lao PDR has generally low results as a function of numerous factors including lack of resources, training and capability, with fundamental improvements needed in most areas, most notably in financial and non-financial supervision, ML investigation and prosecution, and TF and terrorist-related sanctions. Improvements are needed in other areas including international cooperation and TF risk mitigation. 6. Lao PDR’s significant cash-based economy increases both ML and TF risk. The assessment team considers that the casino sector (in particular, casinos in the ‘Golden Triangle’) where customers transact primarily in cash, with limited-to-no oversight and supervision, to be a noteworthy threat to the integrity of Lao PDR’s financial system. Assessment of Risk, coordination and policy setting (Chapter 2 - IO.1; R.1, R.2, R.33 & R.34) 7. Lao PDR faces very significant domestic and cross-border ML risks, but these are not well assessed and understood by authorities. Lao PDR continues to face globally significant risks from illicit proceeds generated by drug production and drug trafficking in the Golden Triangle region and through other areas. In addition to risks of proceeds of drug crime, Lao PDR suffers from illicit proceeds generated from a range of crimes including various types of fraud, corruption, environmental crimes, arms trafficking, human trafficking, and a range of other offences. Lao PDR’s 2018 National Risk Assessment (NRA) highlighted a number of higher risk sectors in the country including banking, casinos, real estate, and trading in precious metals and stones. However, the limited depth, scope and accuracy of the NRA undermines Lao PDR’s understanding of ML/TF risk. Particular concerns are noted with weaknesses in risk-understanding related to corruption and ML, foreign investment, and transnational ML. Very serious concerns are highlighted in this report with respect to ML risk in the casino sector, the absence of risk mitigation controls for casinos, and the generally poor levels of understanding of the risks and vulnerabilities in that sector by both the public and the private sectors. 8. Lao PDR’s assessment and understanding of TF risks is poor and based exclusively on the fact that there have been no investigations into TF, or cases of TF in the courts. The NRA assessed the TF risk in Lao PDR as ‘low’ based solely on these facts. There is a lack of appreciation of the vulnerabilities that raise the risk level of TF, including weak border controls, proximity to regional conflicts and a changing regional environment, coupled with low levels of capacity within competent authorities to respond to changes in the TF threat environment. 9. The National Coordination Committee (NCC) is responsible for leading the development of AML/CFT institutional frameworks and policies. However it lacks a coherent and informed picture of ML and TF risks which affects the development of effective risk mitigation measures. There are also major challenges with domestic operational cooperation to combat ML threats and to combat proliferation financing. Finally, there are significant gaps in the private sector’s understanding of risk, which is partly a function of the lack of detailed sectoral assessments for FIs, and DNFBPs as well as a lack of detailed guidance by authorities to assist the various private sector entities. 6 Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 EXECUTIVE SUMMARY Financial Intelligence, ML Investigations, Prosecutions and Confiscation (Chapter 3 – IO.6, 7,-8; R.1, R.3, R.4, R.29-32) 10. AMLIO is established in the Bank of Lao PDR (BOL) and serves as Lao PDR’s FIU and as an AML/CFT supervisor. AMLIO’s primary responsibilities include data collection, analysis, and dissemination of information relating to ML and TF, and coordination with related domestic and international agencies. The receipt of limited information, especially from higher risk sectors (casinos, banks and real estate), and a lack of supporting IT infrastructure and analytical tools, impede effective analysis. AMLIO collects and analyses various reports, but the range, number and quality of STRs reported is low and non-existent for some high risk sectors, in particular, casinos. This undermines the AMLIO’s ability to produce useful financial intelligence. AMLIO provides information upon request and disseminates ML/TF information spontaneously in limited circumstances. 11. LEAs do not prioritise the use of financial intelligence for investigations of ML predicate offences or the tracing of proceeds of crime. Authorities claim there is no TF in Lao PDR (noted above) and as a result they have not implemented systems to prioritise TF should it occur. Few LEAs integrate financial intelligence with investigations. AMLIO’s disseminations are not regularly used to initiate predicate offence investigations. The key investigative bodies can access some information on request but do not regularly do so. Most AMLIO disseminations are made on request, however the quantum and scope of disseminations to LEAs do not reflect Lao PDR’s risk profile. 12. ML has not been sufficiently prioritised in line with the identified risks. Lao PDR’s ML offences are structurally deficient and ML investigations have exclusively focused on self-laundering. LEAs lack sufficient awareness of the ML offence, and investigation strategies do not focus on investigating the criminals or criminal organisations, or the transnational aspects of crimes by following the money in and through criminal networks. This reflects fundamental weaknesses in the assessment of, and responses to, transnational crime risk (especially drugs), as well as corruption and ML risks. Some ML investigations are conducted as part of joint agency teams, which support inter-agency cooperation. However, LEAs do not, overall, make sufficient use of AMLIO financial intelligence (despite shortcomings) in the course of ML investigations. Prosecutions of the relatively few ML offences have been successful. Lao PDR could not demonstrate the effective use of sanctions in ML cases. All ML cases were disposed of jointly with their underlying predicate offences and therefore penalties and sanctions were imposed globally and could not be disaggregated on a ‘per-offence’ basis. 13. Lao PDR does not employ confiscation to strategically target ML/TF risk. The results of asset restraint and forfeiture actions do not reflect Lao PDR’s risk profile and there are very low rates of confiscation overall. The assessment team is concerned about Lao PDR’s capability and capacity to respond to risk on the border as it relates to cash smuggling and transnational ML occurring in the casino sector – a sector extremely vulnerable to ML. Terrorist and Proliferation Financing (Chapter 4 – IO.9, 10, 11; R.1, R.4, R.5-8, R.30, R.31 & R.39) 14. There have been no investigations, prosecutions or convictions for TF in Lao PDR, which authorities state is consistent with their understanding of TF risk (IO.1). Lao PDR has limited organisational structures to detect and investigate TF. While TF investigation procedures have recently been issued, these procedures do not sufficiently outline the steps to be taken, and coordination to undertake, between agencies and with foreign partners, to effectively investigate potential TF cases. 7 Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 EXECUTIVE SUMMARY 15. Additionally, despite relevant LEAs stating a readiness to respond to TF if it were to occur, significant deficiencies in the TF offence and weaknesses in Lao PDR’s understanding of its TF risks, as well as a lack of ongoing monitoring of possible changes in its TF risk environment, undermine Lao PDR’s preparedness to detect and commence TF investigations. Similarly, while Lao PDR does have international cooperation schemes, it has not pursued sufficient cooperation with foreign partners to be able to identify and investigate TF cases with foreign elements or on behalf of foreign agencies. 16. Lao PDR has a legal framework to apply TFS for terrorism and TF. However, fundamental improvements are required for further enhancing the level of understanding about compliance of TFS obligations among both competent authorities and REs as well as the implementation of a risk-based approach to NPO sector outreach and supervision. No assets and instrumentalities related to TF activities of designated entities and individuals have been identified and frozen, which is consistent with the low TF risk profile. There are gaps in the freezing obligations to apply without delay as well as the lack of notifications of designations, lack of guidance on TFS obligations and lack of supervision and enforcement. Moreover, there is a lack of enforcement actions by competent authorities, and available sanctions are not effective, proportionate, and dissuasive. 17. Lao PDR completed a limited assessment of the NPO sector, but it has not yet identified the sub-set of NPOs most likely to be at risk of abuse for TF. MOHA and MOFA are responsible for the registration and supervision of local NPOs and INGOs respectively. Both local NPOs and INGOs demonstrated no, or very limited, understanding of TF risk and risk mitigation even though awareness raising activities were organised for local NPOs in 2020-2022. Monitoring and supervision of the NPO sector is project- or activity-based and some limited elements of CFT have been included in monitoring, but there has been limited enforcement. There is no practical guidance to the sector about the potential vulnerabilities of NPOs to TF abuse and TF risks, and the measures that NPOs can take to protect themselves against such abuse. 18. Lao PDR established a legal and regulatory framework for TFS for PF in 2020 and has actively organized awareness raising campaigns to enhance effective implementation of TFS obligations which apply to all REs, and natural and legal persons. Larger domestic and internationally exposed FIs demonstrate an awareness of their TFS obligations for PF, while understanding is weak among smaller FIs and especially designated non-financial businesses and professions (DNFBPs). No assets were identified or frozen in relation to the relevant UNSCRs. Delays in the notification of designations, reliance on an English language-based website and lack of guidance to and supervision and enforcement of REs impair the effectiveness of the TFS regime for PF. Lao PDR did not demonstrate its commitment and willingness to implement UNSCR sanctions and was not able to respond to the requests by the assessment team regarding potential sanctions evasion by DPRK nationals indicated in UN reports as being hosted by Lao PDR. Preventive Measures (Chapter 5 – IO.4; R.9-23) 19. Lao PDR has taken steps to strengthen its legal framework for AML/CFT preventive measures although significant gaps remain which hamper the effective implementation by REs. Apart from large banks, the overall understanding of ML/TF risks, and the implementation of risk mitigation measures, including CDD and enhanced due diligence (EDD) and other AML/CFT obligations by REs and especially among DNFBPs, is still in its infancy. Authorities are yet to give the necessary support and adequate guidance to ensure the effective implementation of preventive measures by FIs and DNFBPs. Reporting of STRs is very low and almost all STRs received by AMLIO are from the banking sector. Except for requests for further information on reported STRs, REs do not receive any guidance or feedback on how 8 Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 EXECUTIVE SUMMARY to enhance the quality or number of STRs. Although internal controls are in place in larger domestic and international FIs, many REs lack sufficient internal controls. Supervision (Chapter 6 – IO.3; R.14, R.26-28, R.34, R.35) 20. Banking is dominant in the financial sector due to its size and importance. Banking assets represent the highest percentage relative to other financial institutions (FIs). As such, banking represents an inherently higher ML/TF risk, in line with the NRA findings. Casinos, DPMS and real estate agents represent the highest risk DNFBPs in view of their products/services and the significant use of cash by customers when dealing with these entities. DPMS and real estate agents have yet to be subject to AML/CFT examinations and/or monitoring. There is a low level of understanding of ML and TF risk in these sectors, and AML/CFT compliance is low. 21. AMLIO was initially designated supervisor for AML/CFT for DNFBPs. In 2020, shortly before the originally planned ME onsite visit (postponed due to COVID-19), AML/CFT supervision for DNFBPs was transferred to DNFBP licensing authorities. 22. Risk-based supervision is still at an early stage of implementation for the financial sector and casinos, and has been delayed for the remainder other DNFBPs. AMLIO (the AML/CFT supervisor for the financial sector) and other supervisors need to expand the scope and depth of their AML/CFT supervision as well as the supervisory resources applied to high-risk sectors. The combination of limited understanding of risk and resource-constraints at AMLIO reduce the quality of their supervision. There are mechanisms in place to prevent criminals from entering the market through their respective licensing and registration authorities, but these are not sufficiently implemented. Supervisors have a mixed understanding of ML/TF risks in their sectors and the understanding of the impact of these risks on each sector is basic, with DNFBP supervisors demonstrating a low level of understanding. 23. Sanctions are available to supervisors but these are not dissuasive unless applied at the highest end of the available range. What sanctions have been applied (a low number) are limited to warning letters to FIs for breaches of AML/CFT obligations. Remedial plans in response to on-site examination findings and recommendations (not considered a sanction) are assessed only when follow- up reviews are conducted (not before). Transparency and Beneficial Ownership (Chapter 7 – IO.5; R.24-25) 24. Lao PDR authorities and the private sector have a poor understanding of the ML/TF risks associated with legal persons and legal arrangements. 25. Some basic information on legal persons is publicly available. REs are the main source of information on beneficial ownership of legal persons for competent authorities, but the adequacy, accuracy and currency of the information acquired is weak across FIs and DNFBPs. LEAs indicated that in some cases beneficial ownership information in relation to legal persons was sought, however, most (perhaps all) cases related to requests for basic legal person information. LEAs did not demonstrate a regular or consistent practice of obtaining beneficial ownership information of customers of REs in the course of financial investigations. 26. REs do not collect beneficial ownership information in relation to domestic legal arrangements established under the Civil Code nor do they appear to be doing so with respect to foreign 9 Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 EXECUTIVE SUMMARY trusts. Sanctions available for non-compliance with information collection requirements are not dissuasive and, in any event, no sanctions have been applied. Competent authorities do not obtain beneficial ownership information on legal arrangements in the course of their official duties. International Cooperation (Chapter 8 – IO.2; R.36-40) 27. Lao PDR has a reasonable framework for international cooperation and generally provides timely MLA and extradition assistance when requested. The OSPP as the central authority prioritises requests from ASEAN MLAT jurisdictions and works constructively with these jurisdictions to promptly deal with incoming requests. A manual (as opposed to electronic) case management system in place in which requests from non-ASEAN MLAT jurisdictions should be given priority, however, the timeliness and quality of responses to requests from non-ASEAN MLAT jurisdictions, and how they are prioritised, is unclear. 28. Lao PDR commenced using outgoing MLA requests (as at the time of the on-site visit) to pursue domestic ML, associated predicate offences, and TF cases with transnational elements. Only one MLA request has been made so far, which related to a predicate offence. This is inconsistent with Lao PDR’s risk profile and is, in part, a consequence of a limited understanding of transnational crime risks, and limited domestic investigative and law enforcement activity in relation to ML and TF. 29. Lao PDR did not demonstrate to any extent whether competent authorities engage in international exchanges of basic and beneficial ownership information of legal persons and legal arrangements. Priority Actions a. Significantly improve and update the understanding of risk by conducting further and more robust assessments of national and sectoral ML/TF risks (casinos, real estate, banks, transnational organised crime, corruption, environmental crime, human trafficking, etc.) and cross-border risks. b. Develop expert capability and capacity, and deploy a cohesive and coordinated policy, regulatory and enforcement efforts to identify and mitigate identified ML/TF risks. c. Establish and resource policies and agency-level plans which focus on key risk areas and prioritise the development and use of financial intelligence by AMLIO and LEAs to better support investigations of predicate offences, ML, TF, and asset tracing. d. Provide AMLIO with adequate and effective systems, analytical tools and skills to more effectively produce financial intelligence and to respond to the operational needs of competent authorities e. Prioritise and implement ML investigation procedures for each LEA with a focus on ML associated with key risks, both domestic and cross-border, going beyond the NRA findings to include ML associated with corruption, large-scale transnational drug trafficking, human trafficking, etc. f. Make fundamental enhancements to LEA’s ML investigation teams’ capability to trace and restrain proceeds of crime. Implement prioritised national policies and agency level policies 10 Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 EXECUTIVE SUMMARY and procedures (including enhanced capacity and systems) for tracing, restraining, managing and recovering criminal assets, in particular for high-risk domestic and cross-border crimes. g. Support the identification of potential TF cases by monitoring the threats of TF (domestically, regionally and globally) and possible vulnerabilities within Lao PDR to TF; and remain vigilant against a change in Lao PDR’s TF risk profile; and better support the consideration by frontline investigators of potential TF cases. h. Provide practical guidance to improve understanding and implementation of TFS obligations and establish a clear and prompt mechanism for communicating updates to the sanctions lists. Risk assess NPO sectors, and identify the sub-set of NPOs at greater risk for TF abuse, and tailor outreach, controls and supervision on that sub-sector. Strengthen TFS legal and regulatory framework for PF in compliance with R.7 and prioritise the implementation of TFS obligations, including increased guidance (country-specific PF vulnerabilities), outreach, supervision and enforcement. i. Address TC gaps in relation to preventive measures for CDD, ongoing monitoring, enhanced/specific measures, PEPs, correspondent banking, new technologies including requirements on VASPs, wire transfer rules, internal controls and TFS. j. Take action to implement risk-based AML/CFT requirements in the DNFBP sector without further delay with a focus on casinos, real estate agents, and DPMS. k. Enhance risk-based supervision (frequency, depth and focus) to ensure adequate supervision and monitoring of higher-risk FIs, DNFBPs, and VASPs, in particular prioritising higher intensity supervision of higher-risk financial sectors and casinos. l. Strengthen fit and proper controls to prevent criminals and their associates from holding a significant or controlling interest, or holding a management function, in high-risk DNFBPs (particularly casinos); implement comprehensive checks to enforce these obligations; and promptly identify, remedy, and sanction violations as appropriate. m. Assess the ML/TF risks of all types of legal persons, and develop and implement a strategy to mitigate those risks. Implement comprehensive mechanisms to ensure that accurate and up to date beneficial ownership information is obtained and is available to competent authorities. n. Prioritise and pursue formal and informal international cooperation (possible agency level directives) to support predicate/ML/TF investigations, asset tracing, prosecutions and supervision, particularly for high risk crime-types and in higher risk sectors in keeping with Lao PDR’s risk profile. 11 Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 EXECUTIVE SUMMARY Effectiveness & Technical Compliance Ratings Effectiveness Ratings IO.1 - Risk, policy IO.2 - International IO.3 - Supervision IO.4 - Preventive IO.5 - Legal persons IO.6 - Financial and coordination cooperation measures and arrangements intelligence Low Moderate Low Low Low Low IO.7 - ML IO.8 - Confiscation IO.9 - TF IO.10 - TF preventive IO.11 - PF financial investigation & investigation & measures & financial sanctions prosecution prosecution sanctions Low Low Moderate Low Low Technical Compliance Ratings (C – compliant, LC – largely compliant, PC – partially compliant, NC – non compliant) R.1 - Assessing risk R.2 - National R.3 - Money R.4 - Confiscation & R.5 - Terrorist R.6 - Targeted & applying risk- cooperation and laundering offence provisional financing offence financial sanctions – based approach coordination measures terrorism & TF PC LC PC PC NC PC R.7 - Targeted R.8 - Non-profit R.9 - Financial R.10 - Customer due R.11 - Record R.12 - Politically financial sanctions – organisations institution secrecy diligence keeping exposed persons proliferation laws PC NC LC PC PC NC R.13 - R.14 - Money or R.15 - New R.16 - Wire R.17 - Reliance on R.18 - Internal Correspondent value transfer technologies transfers third parties controls and foreign banking services branches and subsidiaries LC PC NC PC N/A LC R.19 - Higher-risk R.20 - Reporting of R.21 - Tipping-off R.22 - DNFBPs: R.23 - DNFBPs: R.24 - Transparency countries suspicious and confidentiality Customer due Other measures & BO of legal persons transactions diligence PC PC PC PC NC NC R.25 - Transparency R.26 - Regulation R.27 - Powers of R.28 - Regulation R.29 - Financial R.30 - & BO of legal and supervision of supervision and supervision of intelligence units Responsibilities of arrangements financial institutions DNFBPs LEA and investigative authorities NC PC LC NC PC LC R.31 - Powers of law R.32 - Cash couriers R.33 - Statistics R.34 - Guidance and R.35 - Sanctions R.36 - International enforcement and feedback instruments investigative authorities PC LC PC NC PC PC R.37 - Mutual legal R.38 - Mutual legal R.39 - Extradition R.40 - Other forms assistance assistance: freezing of international and confiscation cooperation LC PC PC PC 12 Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 1 MUTUAL EVALUATION REPORT OF LAO PDR Preface This report summarises the AML/CFT measures in place in Lao PDR as at the date of the on-site visit – 12-23 September 2022. It analyses the level of compliance with the FATF 40 Recommendations of 2012 and the level of effectiveness of Lao PDR’s AML/CFT system based on the FATF’s 2013 assessment methodology. Recommendations in this report suggest how Lao PDR’s system can be strengthened. The evaluation was conducted by an assessment team consisting of:  Mr. Akira Irie, Ministry of Justice, Japan (legal expert);  Mr. Craig Hamilton, New Zealand Police, New Zealand (FIU/law enforcement expert);  Ms. Subhani Keerthiratne, Central Bank of Sri Lanka, Sri Lanka (financial expert)  Ms. Carolyn Marsden, AUSTRAC, Australia (legal expert);  Ms. Gantsetseg Myagmarjav, Central Bank of Mongolia, Mongolia (financial expert);  Ms. Chantanee Suppasrivasuseth, Anti-Money Laundering Office, Thailand (FIU/law enforcement expert); and  Ms. Aida Kasumawati Mohd Yatim, Bank Negara Malaysia, Malaysia (financial expert). The assessment team was supported by the following persons from the APG Secretariat: Gordon Hook, Erin Lubowicz, Daniel Qualischefski, Gavin Raper, David Shannon, Nicole VanLent, and Suzie White. The report was reviewed by Mr. Daniel Tang (Office of Internal Audit, Monetary Authority of Macao, China), Mr. Muammad Mohsin Hossaini (Additional Director, Bangladesh Financial Intelligence Unit, Bangladesh), Mr. Fu Hsuan Wu (Executive Officer, Financial Supervisory Commission, Chinese Taipei) and the FATF Secretariat. Statistical tables Information shown in tables throughout this report has been sourced directly from Lao PDR government authorities, unless otherwise stated. Translations of legal instruments Non-official English translations of laws and other relevant instruments were provided by Lao PDR authorities. The translations were treated as accurate for all purposes from the outset of the evaluation. Exchange rates In this report, Lao PDR’s currency is adjusted at the US conversion rate in effect at the time of the on- site visit: 1.00 USD = 16,315 Lao Kip (LAK). However, some tables convert LAK for years prior to 2022 for historical purposes (e.g., in confiscation tables). The historical exchange rates in years prior to 2022 use the USD exchange rate effective 1 July in the stated year. Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 13 CHAPTER 1. ML/TF RISKS AND CONTEXT CHAPTER 1. ML/TF RISKS AND CONTEXT 1 1. The Lao People’s Democratic Republic (Lao PDR) is a landlocked country on the Indo-Chinese peninsula in Southeast Asia. It shares borders with five countries: Myanmar (238 km), the People’s Republic of China (475 km), Vietnam (2,161 km), Cambodia (555 km), and Thailand (1,845 km). Lao PDR covers an area of 236,800 km2 and has a population of approximately 7.5 million. 1 With 50 officially recognized ethnic groups, Lao PDR is the most ethnically diverse country in Southeast Asia. 2 The official language of Lao PDR is called Lao or Laotian, it occurs in multiple dialects and is one of the Tai languages of Southeast Asia. 2. Lao PDR has seen a relatively rapid and steady economic growth in recent decades based primarily on natural resources such as hydropower, mining and timber. Smallholder agriculture is the predominant source of income and employment for 78 per cent of the population. 3 While the country has one of the lowest population densities in the region (approximately 32 inhabitants/km2), the mountainous topography limits the arable land. 4 Over 60 percent of the population lives in rural areas, where most of the households (80 percent) are still subsistence farmers. 5 3. The United Nations has classified Lao PDR as a least developed country, with an estimated GNI per capital of USD2,539 in 2022 6 and an estimated GDP per capita of USD 2,536 7 in 2020. The Lao PDR economy is heavily reliant on hydropower, mining, forestry, and farming. 8 4. Lao PDR is a one-party parliamentary socialist republic. The only legal political party is the Lao People’s Revolutionary Party (LPRP). The General Secretary of the LPRP is the President of Lao PDR and the head of State; the Prime Minister is the head of government. The eleven-member Politburo of the LPRP is the key decision-making body and it constituents are drawn from the 49-member Central Committee. 5. The Government of Lao PDR is the Executive Branch of the State. It is approved by and responsible to the National Assembly and the President of the State. The Executive Branch is the primary organisation for administration and consists of the Council of Ministers which includes the Prime Minister, Deputy Prime Ministers, Ministers, and chairs of government agencies (Constitution, Art. 71). Lao PDR has 17 provinces and one municipality. There are three levels of local administration within each province: provincial, district and village administrations. 6. The Legislative Branch consists of a unicameral National Assembly (Sapha Heng) directly elected by citizens from a list of candidates approved by the LPRP. The National Assembly meets twice a year and has the power to make laws and oversee the activities of the executive, the people’s courts and the Office of the Public Prosecutor. The National Assembly Standing Committee is the permanent body of the National Assembly and acts on behalf of the National Assembly between sessions. The National Assembly Standing Committee consists of a Chair, Vice-Chair and members. 1 (2021) datacatalog.worldbank.org 2 https://www.fao.org/3/cc0302en/cc0302en.pdf 3 https://webapps.ifad.org/members/eb/125/docs/EB-2018-125-R-25.pdf?attach=1 4 https://www.fao.org/3/cc0302en/cc0302en.pdf 5 https://www.fao.org/3/cc0302en/cc0302en.pdf 6 https://www.un.org/development/desa/dpad/wp-content/uploads/sites/45/CDP-PL-2022-8-4-Monitoring.pdf 7 https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=LA 8 https://oec.world/en/profile/country/lao Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 14 CHAPTER 1. ML/TF RISKS AND CONTEXT 7. Lao PDR is a civil law jurisdiction generally based on its historical relationship with France. Legislation is the primary source of law. Jurisprudence is not binding on judges. International treaties 1 and agreements ratified by Lao PDR form part of its sources of law. Lao PDR’s hierarchy of laws is reflected in the Law on Making Legislation, 2012, Part 1, and outlined below in Table 1.1. Table 1.1: Hierarchy of legal instruments in order of enforceability Legal Instruments 1. Constitution 2. Laws (including Penal/Civil Code) 3. Resolutions of the National Assembly 4. Resolutions of the Standing Committee of the National Assembly 5. Ordinances of the President of the Republic 6. Decrees of government 7. Resolutions of the government 8. Orders and Decisions/Agreements of the Prime Minister 9. Orders, Decisions/Agreements and Instructions of the Minister and head of government authority 10. Resolutions of Provincial People’s Assembly 11. Resolutions of the Standing Committee of the Provincial People’s Assembly 12. Orders, Decisions/Agreements and Instructions of the Provincial Governors and City Governors 13. Orders, Decisions/Agreements and Instructions of the District and Municipality Chiefs 14. Village Regulations 8. The Judicial branch is appointed by the National Assembly Standing Committee. The highest court is the People’s Supreme Court (consisting of the court president) with criminal, civil, administrative, commercial, family, and juvenile chambers, each with a vice-president and several judges. Subordinate courts are appellate, provincial, municipal, district and military courts. The hierarchy of the Lao PDR court system is: People’s Supreme Court (the highest court); People’s Court of Appeal (hears appeals from courts of first instance); Regional Courts (People’s City Courts and People’s Provincial Courts); First Instance Courts (People’s District Courts and People’s Municipal Courts); Military Courts (High Military Court and Regional Military Court). 9. If necessary, the National Assembly Standing Committee may decide to establish a ‘special court’ under Article 90 of the Constitution to deal with any matter. 10. The President of the People’s Supreme Court is appointed, and may be removed, by the National Assembly based on the recommendation of the President of the State. The term of office of the President of the People’s Supreme Court is the same as the term of office of the National Assembly. The vice-presidents of the People’s Supreme Court are appointed or removed by the President of the State based on the recommendation of the President of the People’s Supreme Court. Judges of the People’s Supreme Court, presidents, vice-presidents, and local courts’ judges are appointed, transferred and removed by the National Assembly based on the recommendation of the President of the People’s Supreme Court. Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 15 CHAPTER 1. ML/TF RISKS AND CONTEXT ML/TF Risks and Scoping of Higher-Risk Issues 1 Money Laundering Risks 11. Lao PDR is impacted by high levels of proceeds-generating crimes including significant illicit proceeds generated from drug production and trafficking (including opiates) in the ‘Golden Triangle’ region and through other areas. Various forms of fraud, environmental crimes, arms trafficking, human trafficking, illicit resource extraction (of jade), human trafficking, theft and other offences are also of concern in Lao PDR. The activities of large-scale transnational crime groups is a serious concern and threat to the country. Sectors posing varying levels of ML and TF risk include banks, casinos, real estate agents, and trading in precious metals and stones, as well as significant issues relating to its cash-intensive economy. Moreover, there is a concern with relatively new Special Economic Zones (SEZs) established as part of a government initiative to attract and maintain foreign investment for infrastructure development. Some of the 12 zones currently in existence have been linked to ML associated with high risk predicate crimes, including drug trafficking and illegal trade in wildlife and exotic animal parts. 12. Credible assessment of drug threats in Lao PDR supported by open source reporting, including by the UNODC, note that Lao PDR remains a major transit point for methamphetamine trafficking from Myanmar, and a producer of opium.9 The UNODC also notes that there has been an exponential increase in seizures of precursors in the Golden Triangle in the preceding five years. 13. Lao PDR has significant exposure to cross-border illicit flows related to crimes in other jurisdictions. The increasing use of Lao PDR as a transit jurisdiction for both narcotics and precursors can be attributed to the country’s geographical position in South East Asia, and the porous nature of its lengthy and rugged borders (difficult to police), making it an attractive smuggling route. Authorities recognize some risks from foreign criminals using Lao PDR as a transit country. The MERs of all five neighbours identified major to very significant cross-border crime risk, in particular Myanmar. 14. Lao PDR’s borders are exploited for other forms of smuggling and trafficking, including persons, cash, wildlife, and precious metals and stones. Human trafficking remains a significant problem and is infrequently detected by authorities, but under-reported.10 15. Lao PDR faces significant risks from environmental crimes and related proceeds including trafficking in wildlife and forestry offences. UNODC highlighted the wide scope of some aspects of wildlife offences in Lao PDR, its strategic location and a lack of capacity to enforce CITES regulations and national wildlife laws. Lao PDR is reported as a hub for illicit international wildlife trade.11 16. Lao PDR faces significant ML risks from corruption, with proceeds of corruption laundered within and outside of Lao PDR. Corruption challenges include PEP involvement in high risk sectors of the economy (e.g. casinos). Corruption is an issue in Lao PDR with nepotism contributing to 9 UNODC (2021), Synthetic Drugs in East and Southeast Asia – Latest developments and challenges at: https://www.unodc.org/roseap/uploads/documents/Publications/2021/Synthetic_Drugs_in_East_and_Southeast_Asia_202 1.pdf, p. 61. 10 UNODC (2017) Trafficking in persons from Cambodia, Lao PDR and Myanmar to Thailand Report. 11 UNODC (2019), Transnational Organized Crime in Southeast Asia: Evolution, Growth and Impact. Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 16 CHAPTER 1. ML/TF RISKS AND CONTEXT management failure and chronic loses in state-owned enterprises and embezzlement of development funds by officials.. 12,13,14 1 Terrorist Financing Risks 17. Lao PDR has indicated that there has been no evidence of threats from transnational or domestic terror groups in Lao PDR. The NRA assessed TF in Lao PDR as low and found that no cases of TF had been filed or prosecuted since the last mutual evaluation in 2011. The assessment team’s scoping of risks ahead of the on-site visit concluded, on a preliminary basis, that there is a low threat of domestic terrorism financing in Lao PDR. However, Lao PDR’s porous borders, its proximity to conflict areas, and the changing regional context, coupled with low levels of capacity within competent authorities to respond to changes in the TF threat, are a concern. 18. Lao PDR’s assessment of TF risk was based on the lack of cases however the regional context (borders with Myanmar and Thailand where TF risk is high) was not fully considered and commented upon. VA/VASP Risks 19. Lao PDR faces similar risks in the misuse of crypto-currencies and virtual assets as those faced by other economies in the Mekong sub-region. The NRA 2018 did not assess the risks of VAs and VASPs. Further, deficiencies in the September 2022 risk assessment of the VASP sector provides no further insight into the specific ML/TF risks Lao PDR may face. Special Economic Zones (SEZs) 20. In 2010, Lao PDR issued the ‘Decree On Special Economic Zone[s] and Specific Economic Zone[s] 443/PM/2010’ which defines the principles, regulations and organisation of these zones. According to Article 2 of the Decree, SEZs receive specific privileges, have an autonomous economic and financial system, and are managed and administered by the Economic Executive Board according to a 'one-stamp mechanism' (ease of business). Specific Economic Zones can be established inside a Special Economic Zone under an agreement between an investor and the Administrative Committee. SEZs are intended to support development of new infrastructure and commercial facilities. The Decree includes special incentives for investment. 21. The additional ‘Decree on Special Economic Zone No 188/GOV dated 7 June 2018’ (Decree on SEZ) provides for special tax and customs incentives to attract investments ‘through the formulation of special promotion policies’ in order to ‘enable regional and international integration, and contribute to the continuous and sustainable national socio-economic development’ (Art. 1). Foreign investors may also obtain residency rights (Art. 70, Law on Investment Promotion). There are no specific controls oversighting SEZ developers’ or investors’ bank accounts to monitor financial inflows or outflows. Lao PDR has designated 12 SEZs for a range of purposes broadly falling within three categories: industrial zones (5); tourism and new urban centres (4); and trade and logistics zones (3). 15 Collectively these 12 SEZs cover an area greater than 18,415 ha and include a mix of government and privately operated zones involving companies from China, Vietnam, Lao PDR, Chinese Taipei and Malaysia. The World Bank notes that 55% of the workers in the SEZs are foreigners. 16 From 2016-2020, 743 companies 12 https://www.transparency.org/en/countries/laos2022 13 https://thediplomat.com/2022/06/laos-is-on-the-brink-of-sovereign-bankruptcy/ 14 https://laotiantimes.com/2022/04/20/state-inspection-authority-usd-732-million-lost-to-corruption-since-2016/ 15 https://investlaos.gov.la/where-to-invest/special-economic-zone-sez/ 16 World Bank Economic Monitor Report, p. 42. Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 17 CHAPTER 1. ML/TF RISKS AND CONTEXT invested over USD 12 billion in registered capital into SEZs and included foreign investors from 18 jurisdictions. 17, 18 A further USD 2.5 billion was invested in 2021. 19 1 22. Credible open source reporting notes that casinos operating in SEZs appear to operate outside government control and in contravention of laws. Human, narcotics and wildlife trafficking and the laundering of proceeds through casinos are of particular concern in these areas, specifically the Golden Triangle SEZ. 20,21 In 2015 following an extensive on-site investigation, the NGO Environmental Investigation Agency (based in London), reported that the SEZs are a growing hub for illegal wildlife trade including tiger skins and body parts, rhino horns and ivory. 22 23. One casino reported operating entirely on a cash basis, including the wages of all staff and the payment of all investments. A number of factors raise further concerns of integrated ML risks, including the fact that in 2018, a foreign government sanctioned companies and individuals operating in the Golden Triangle SEZ declaring them a transnational criminal organisation. 23 The sanctioned person was the beneficial owner of a casino, however, authorities took no action to respond to these risks. 24 An international airport in the SEZ with an initial capacity for 500,000 visitors annually, and reportedly owned by the same sanctioned individual, is expected to open in May 2023. 25,26 Scoping Note 24. Based on material provided by Lao PDR and open source information, a pre-onsite scoping note was prepared on risks faced by Lao PDR and considered the following to be high risk crimes: drug production and trading; a range of fraud offences; theft of property, corruption and bribery, and environmental crime. 25. AML enforcement and prevention activities at the border, and related international cooperation measures, present challenges to Lao PDR. The scoping exercise identified significant 17 The Phnom Penh Post, 743 Companies Invest in Lao SEZs Over Five Years, 12 December 2021. https://www.phnompenhpost.com/business/743-companies-invest-lao-sezs-over-5-years 18 Investment Promotion Department, All Approved Investment Projects by Country (1 January 2016 to 31 December 2020), 12 September 2022. From: https://investlaos.gov.la/resources/statistics/ 19 Investment Promotion Department, All Approved Investment Projects by Country (1 January 2021 to 31 December 2021), 12 September 2022. From: https://investlaos.gov.la/resources/statistics/ 20 Indonesia Ministry of Foreign Affairs, Fifteen Indonesian Human Trafficking Victims Repatriated from Golden Triangle Area in Bokeo, Laos 26 June 2022. https://kemlu.go.id/portal/en/read/3728/berita/fifteen-indonesian-human-trafficking- victims-repatriated-from-golden-triangle-area-in-bokeo-laos 21 Investment Monitor, Golden Triangle,: The World’s Worst Special Economic Zone. 28 March 2022. https://www.investmentmonitor.ai/comment/golden-triangle-special-economic-zone-laos-worst/ 22 Sin City: Illegal Wildlife Trade in Lao’s Golden Triangle Special Economic Zone London, UK, 2015. Also: Daan P Van Uhm, (2022) Illegal wildlife trade in two special economic zones in Laos: Underground–open-sale fluctuations in the Golden Triangle borderlands at: https://www.frontiersin.org/articles/10.3389/fcosc.2022.1030378/full. 23 US Department of the Treasury, Treasury Sanctions the Zhao Wei Transnational Criminal Organisation. 30 January 2018. https://home.treasury.gov/news/press-releases/sm0272 24 The sanctioned person received a Lao government bravery award - https://laotiantimes.com/2022/10/03/laos- government-presents-medal-to-chinese-casino-operator/ 25 Bokeo Airport to Start Operations in May 2023, Visapara Phontham, 3 January 2023. At: https://laotiantimes.com/2023/01/03/bokeo-airport-to-start-operations-in-may-2023/ 26 Laos’ Bokeo International Airport to Open Next Year, Ong Jeng Yan 27 December 2021, at: https://smartaviation- apac.com/laos-bokeo-international-airport-to-open-next-year/ Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 18 CHAPTER 1. ML/TF RISKS AND CONTEXT sectoral weaknesses relating to criminal proceeds flowing into Lao PDR as a function of those vulnerabilities. Sectors of concern were the following: 1 banks; casinos; real estate agents; dealers in precious metals and stones. 26. The assessment team identified lesser risks from securities firms and non-deposit-taking banks, group finance companies, and asset management companies whose activities are focused primarily on managing portfolios of non-performing loans of domestic FIs. These entities were considered to have lower ML/TF risks. Materiality Cash economy 27. Lao PDR’s economy is heavily cash-based and largely dollarized. 27 Some measures are in place to promote the greater use of local currency and facilitate de-dollarization. These measures include a Lao Kip promotional campaign and a policy of enforcement of legislation on domestic transactions to be based in Lao Kip. 28 However, in mid-2022 (just prior to the on-site visit) Lao PDR faced a crisis with foreign debt further undermining the Lao Kip. 29 In June 2022, inflation rose to a 20 year high 30 and, as a result, the Lao Kip lost over 38% of its value against the US dollar, and 33% against the Thai Baht (THB), noting that Thailand is Lao PDR’s major trading partner. 31 28. The reduction of cash usage and increased adoption of digital payments to support the digital economy are strong priorities of Lao PDR’s ‘Five-Year Payment System Development Strategy of Banking-Financial System (2021-2025).’ 32 Financial inclusion/exclusion, remittances 29. Lao PDR suffers from low levels of financial inclusion, with inclusion-problems related to formal remittance. Global Findex data from 2017 indicates that just under 29% of persons aged 15 and over have an account at a formal financial institution and only 6% received wages by transfer into an account. 33 Digital financial services are increasing, albeit from a very low base. 34 30. Remittances are predominantly from Lao migrant workers in Thailand. Over the five-year period, 2017-2021, remittances into Lao PDR averaged USD 412M. Remittances accounted for 60% of household income in the 9% of households that received remittance. During the Covid-19 pandemic 27 Kyophilavong, Phouphet; Uddin, Gazi; Shahbaz, Muhammad; Harvie, Charles; and Charoenrat, Teerawat, "Money Demand in a Dollarized Economy: Evidence from Laos PDR" (2019). Faculty of Business - Papers (Archive). 1679. https://ro.uow.edu.au/buspapers/1679 28 IMF Article IV Consultation August 2019 - https://www.imf.org/- /media/Files/Publications/CR/2019/1LAOEA2019002.ashx 29 https://asiatimes.com/2022/10/china-indebted-laos-way-more-broke-than-advertised/ 30 https://www.dw.com/en/laos-economic-crisis-intensifies-amid-massive-chinese-debt/a-62758725 31 Asian Development Bank, Asian Development Outlook 2022 Update: Entrepreneurship in the Digital Age (page 176), September 2022 32 World Bank, Positioning the Lao PDR for a Digital Future, (pages 34) 28 June 2022 33 Global Partnerships for Financial Inclusion G20 Financial Inclusion Indicators, at: https://datatopics.worldbank.org/g20fidata/country/lao-pdr# 34 World Bank, Positioning the Lao PDR for a Digital Future, (pages 32 -37) 28 June 2022 Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 19 CHAPTER 1. ML/TF RISKS AND CONTEXT (2020-2022) remittances into Lao PDR declined by approximately 56%. The value of informal remittances is estimated to be in the range of USD 150-200M per year. 35 1 Table 1.2: Remittances into and out of Lao PDR (figures in USD Million) Remittances 2016 2017 2018 2019 2020 2021 Total amount of remittances by 385.66 450.88 433.12 407.19 360.85 435.43 individuals Transfers from workers 104.80 110.07 56.39 78.79 69.92 82.57 Individual transfer 280.86 340.81 376.73 328.39 290.93 352.86 Gross Domestic Product 15.902 17.061 18.129 18.718 19.097 18.892 Ration of remittances to GDP 2.43% 2.64% 2.39% 2.18% 1.89% 2.29% VA and VASPs 31. In 2018 the Bank of Lao (BOL) issued a public warning to residents about the risks of trading in cryptocurrencies including ML/TF risk. BOL subsequently issued Notice No.382/CO in October 2018 to FIs prohibiting them from owning, operating, or being involved in supporting, cryptocurrency business operations. BOL advised FIs to increase their oversight when offering credit or deposit services to businesses that may be related to cryptocurrency operations. 32. In 2021 Lao PDR announced a new pilot programme to allow the mining and trading of cryptocurrency 36 and allowed six companies to participate in a three-year pilot programme. 37 The programme aims to assist Lao PDR in becoming a key cryptocurrency market in the region and to generate up to a possible USD 190M in new revenue to assist in increasing officials’ wages, pay off debt, and cover pandemic-related expenditures. 38 Crypto-mining firms were to pay USD1M per 10 megawatts used and crypto-trading firms were to pay USD 1m and 15% income tax. 39 In January 2022, BOL issued the first two crypto-trading licences 40 and in May 2022 it was reported that the first crypto- mining operation was launched 41 (although officials have indicated that no such operation were in existence though one was nearing launch). 33. The pilot programme heightens Lao PDR’s exposure to ML/TF risks and it was not until September 2022 that a basic VA/VASP risk assessment was produced. 35 Development Research Institute and International Organisation for Migration, Remittance Landscape in Lao People’s Democratic Republic 2022. 36 https://www.lexology.com/library/detail.aspx?g=87acfa2e-16ae-4324-b1cc-3578e43964b1 37 On 24 November 2021, BOL’s Payment Systems Department ordered one of these companies to cease operating because it was not operating in accordance with its agreement (https://laotiantimes.com/2021/11/25/bank-of-laos-orders-phousy- group-suspend-welnance-cryptocurrency-operations/). 38 https://aifgrouplaos.com/News/NewsDetails?id=46 39 https://laotiantimes.com/2021/11/15/government-issues-regulations-for-cryptocurrency-miners-and-platforms-in- laos/. 40 Xinhua, Lao central bank issues licenses for cryptocurrency exchange platforms. 19 January 2022. Available from https://english.news.cn/asiapacific/20220119/d58d9ca2cd7848e5bb18646f6993a63d/c.html 41 https://aifgrouplaos.com/News/NewsDetails?id=46 Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 20 CHAPTER 1. ML/TF RISKS AND CONTEXT Exposure to trade and finance with DPRK 1 34. Lao PDR maintains full diplomatic relations with the DPRK and in March 2020 the jurisdictions signed a new cooperation agreement. 42 35. In March and September 2022, a UN Panel of Experts identified at least four restaurants, one night market and one IT service company operating in Lao PDR employing DPRK nationals after applicable measures towards the closure of the restaurants, cancellation of the corporate registration of the IT company and the repatriation of those nationals were taken by Lao authorities in 2020. Lao PDR repatriated 28 DPRK workers between 2017 and the second half of 2019. 43 Structural Elements 36. The World Bank’s World Wide Country Snapshot shows that Lao PDR has made significant progress on political stability and absence of terrorism. Although there are moderate improvements in the rule of law, government effectiveness, and control of corruption, overall rankings, however, remain low. There was no improvement in voice and accountability and regulatory quality rankings. Table 1.3: Lao PDR Governance Indicators 2008 – 2011 Percentile Rank (0-100) Percentile Rank (0-100) Indicator 2011 2021 Voice and Accountability 4.69 4.35 Political Stability & absence of violence/terrorism 45.02 69.81 Government effectiveness 22.27 30.29 Regulatory quality 18.48 18.27 Rule of law 16.43 27.40 Control of corruption 9.95 15.38 Source: World Bank’s World Wide Country Snapshot. 37. Lao PDR also ranks low on Transparency International’s 2022 Corruption Perceptions Index. 44 Lao PDR scored 30 out of 100 (with zero being a high perception of corruption and 100 being a very low perception of corruption), ranking 126 of 180 countries. Lao PDR’s improvement in more recent years (since 2017) is slight, suggesting that corruption remains a significant issue. According to some media sources, corruption restrains Lao PDR’s economic development (through loss of revenue) 45 and some members of Lao PDR’s National Assembly have pointed to cases of bribery, lenient judicial treatment of corrupt officials, and political interference in decisions by the courts. 46 Lao PDR’s NRA, on the other hand, assessed bribery as a low-medium risk notwithstanding that (according to State run media) the Prime Minister told the National Assembly recently that ‘embezzlement by executives and staff, combined with poor management, are the main reasons for the chronic losses suffered by State enterprises.’ 47 42 https://www.nknews.org/2020/04/north-korean-lao-foreign-ministries-sign-cooperation-agreement-in-vientiane/ 43 United Nations Security Council Panel of Experts Reports established pursuant to Security Council resolution 1874 (2009), March 2022 and September 2022. 44 https://www.transparency.org/en/cpi/2022/index/lao 45 https://thediplomat.com/2022/06/laos-is-on-the-brink-of-sovereign-bankruptcy/ 46 https://www.rfa.org/english/news/laos/corruption-06172019142019.html 47 https://www.vientianetimes.org.la/freeContent/FreeConten121_PM_y22.php Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 21 CHAPTER 1. ML/TF RISKS AND CONTEXT 38. The Heritage Foundation 2023 Index of Economic Freedom 2022 notes that Lao PDR’s overall legal framework is inefficient and lacks transparency. The rule of law is undermined by corruption and 1 political interference. 48 Political stability 39. The World Bank’s 2022 Worldwide Governance Indicators rate Lao PDR’s performance in terms of political stability (69.81 on a scale from 0 to 100), control of corruption (15.38), regulatory quality (18.27), government effectiveness (30.29) and rule of law (27.4). 49 The scores for political stability and rule of law are a significant improvement on Lao PDR’s 2016 results. The remainder of the indicators also show an improvement, except for regulatory quality which has decreased over 6%, government effectiveness which has declined over 8%, and voice and equality which has decline slightly. High-level commitment 40. Despite the ranking reflected above, Lao PDR’s government has expressed its high-level commitment to implement FATF Recommendations. This was reflected through the previous FATF ICRG process and also in the preparation and conduct of the mutual evaluation. There is direct ministerial input to national level AML/CFT coordination structures. Stable institutions with accountability, integrity and transparency 41. Lao PDR faces a number of significant challenges with achieving more open government, regulatory enforcement, rule of law and fundamental rights. The World Bank has noted that regulatory frameworks to promote corporate governance and to mitigate conflicts of interest are inadequate. ‘Regulatory complexity and discretion discourage new enterprises from entering and have led to the prevalence of informal business practices.’50 The World Bank noted further that: ‘More than half of informal businesses choose to remain informal to avoid the cost and difficulty of registration... Even among registered businesses informal practices are prevalent.’ 51 There are few civil society organisations that are able to actively operate in the Lao PDR to promote accountability and to work to improve integrity and transparency across Lao PDR’s society and economy. 42. There are a number of impediments to freedom of the press in Lao PDR. Media coverage of significant financial crime matters in Lao PDR is available to some degree via open source media outlets, which also assists the private sector’s understanding elements of the risk environment for profit-driven crime. Rule of law and the judicial system 43. Significant concerns remain with the independence and impartiality of the judiciary stemming from corruption. Cases of bribery, lenient judicial treatment of corrupt officials, and political interference in decisions by the courts 52 have been reported by independent sources including members of the National Assembly and the State Inspection Authority. 53 Lao PDR has taken a number of steps during implementation of the 2009 Legal Sector Master Plan and the 2009 Master Plan on 48 https://www.heritage.org/index/country/laos. 49 Worldwide Governance Indicators https://info.worldbank.org/governance/wgi/Home/Reports. 50 World Bank, Lao PDR Economic Monitor Tackling Macroeconomic Vulnerabilities, October 2022 p. 40. 51 Ibid. 52 US Department of State, 2021 Country Report on Human Rights Practices: Laos at: https://www.state.gov/reports/2021- country-reports-on-human-rights-practices/laos 53 https://www.unafei.or.jp/publications/pdf/GG8/19_GG8_IP_Lao_PDR.pdf. Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 22 CHAPTER 1. ML/TF RISKS AND CONTEXT Development of the Rule of Law in Laos toward 2020. 54 The plan identified a wide range of challenges with capacity, structures and efficiency. Steps taken to meet some challenges include capacity building 1 and structural reforms in various areas of the judiciary. The Ministry of Justice (MOJ) approved a Strategic Plan 2021-2025 with goals to develop further judicial capacity. Background and other Contextual Factors Issues of corruption 44. Lao PDR authorities identify corruption (including embezzling property, receiving bribes and abusing positions of power) as a major predicate for ML and a major challenge. Lao PDR has taken steps towards prosecution and punishment of corrupt individuals over the last few years but corruption remains a significant challenge, and occurs at all levels and in all sectors. 55 Issues of corruption represent significant impediments to the implementation of effective AML/CFT systems. Geographical context 45. Lao PDR’s geographical location and the fact that a significant portion of its border crossings are uncontrolled presents significant challenges to the effective implementation of AML/CFT controls. 46. Lao PDR has 38 official international border crossings (including land, airports, rail and a dry port), for which there are only 985 enforcement staff. There are also many informal and illegal land 56 border crossing points capable of exploitation. The relatively high number of border crossings between Lao PDR and its neighbours without patrolled checkpoints exacerbates the vulnerabilities to illicit trafficking and smuggling, 57 as well as illicit cross-border transportation of currency. In 2017, UNODC reported that the scale of irregular migration from Lao PDR to Thailand was very significant and potentially in excess of legal cross-border movements. 58 Cross-border trade 47. Cross-border trade has been increasing significantly. In 2020, Thailand (34%), China (28%) and Vietnam (19%) accounted for over 83% of Lao PDR’s cross-border trade. 59 US Dollars, Thai Baht and Chinese Yuan are widely used in some parts of Lao PDR for trade and business (formal and informal). AML/CFT Strategy 2021-2030 – ‘Vision to 2035’ 48. In September 2022 (week prior to the on-site visit) the President of Lao PDR endorsed the ‘Strategy on AML/CFT of Lao PDR – In the Period of 10 years (2021-2030) and Vision to 2035’ (AML/CFT Strategy 2021–2030) which was prepared by the NCC after the NRA’s adoption. The strategy aims to strengthen AML/CFT measures as one of the state’s tools to maintain peace, public order, and to promote sustainable socio-economic development. The strategy provides a road map for policy 54 https://www.undp.org/sites/g/files/zskgke326/files/migration/la/LSMP__Sep_2009_.pdf 55 https://www.rfa.org/english/news/laos/corruption-06172019142019.html https://www.unafei.or.jp/publications/pdf/GG8/19_GG8_IP_Lao_PDR.pdf 56 This information is on the Lao Department of Immigration website at: https://immigration.gov.la/checkpoints/ 57 The APG MERs of Cambodia (2017), Thailand (2017) and Vietnam (2021) have all referenced common porous borders including with Lao PDR and risks emanating from those borders. 58 Trafficking in persons from Cambodia, Lao PDR and Myanmar to Thailand (2017), UNODC, 58-39. 59 https://wits.worldbank.org/CountrySnapshot/en/LAO. Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 23 CHAPTER 1. ML/TF RISKS AND CONTEXT development and for the assignment of specific actions across the membership of the NCC to respond to weakness and risk in Lao PDR’s AML/CFT system. 1 49. In addition to the AML/CFT Strategy 2021-2030, Ministries implemented a range of directives to respond to ML. For example, the Ministry of Forestry was given responsibility to investigate ML related to environmental crime (included in their strategic plan to 2025). The NRA identified environmental crime as a low threat however open-source reporting on wildlife related crime, in particular the farming and trafficking of exotic animals and animal products, and the acknowledgement that Lao PDR citizens receive high amounts of funds from these crimes, contradict this assessment. 60 50. The AML/CFT Strategy 2021-2030 also identifies that legislative requirements for an effective AML/CFT system have not been fully implemented; coordination required by legislation has not been fully established; budget limitations are impeding the training and development of staff with AML/CFT duties and responsibilities including LEAs, and that the depth of understanding of the responsibilities by the private sector remains limited. In response, the AML/CFT Strategy 2021-2030 sets out five areas of focus: first, to strengthen legal frameworks; second, to review the NCC and its roles and responsibilities to improve its capability and that of its membership; third, to improve performance of supervisors and the understanding of risk across all reporting sectors; fourth, to improve capacity and capability to investigate and prosecute high risk predicate crimes, ML and TF; and fifth, to strengthen international cooperation. Lao PDR is taking steps to meet these five goals. Legal & institutional framework 51. The following agencies and Ministries have roles in relation to AML/CFT: AMLIO: AMLIO is the financial intelligence unit and AML/CFT supervisor of FIs and casinos. It is also the secretary to the NCC. AMLIO is established within the Bank of Lao by statute. Bank of Lao PDR (BOL): BOL is the central bank of the Lao PDR. BOL is the prudential regulator and supervisor of the banking sector, MVTS and certain NBFIs. Ministry of Public Security (MoPS) – General Department of Police: This agency is responsible for all crimes. Five departments responsible for ML investigations: Criminal Investigation Department (CID); Counter Narcotics Department (CND); Human Trafficking Department.; Environment Crime Department.; and Economic Police Department (EPD). The CID is responsible for TF investigations. Office of the Supreme People’s Prosecutor (OSPP): OSPP is responsible for the prosecution of ML and TF offences. Ministry of Foreign Affairs (MOFA): MOFA has a role in implementing aspects of TFS in Lao PDR and the regulation of foreign NGOs operations. Ministry of Finance (MOF): MOF supervises and regulates the insurance sector, including for AML/CFT. MOF is responsible for licensing and AML/CFT supervision of audit firms. 60 Environmental Investigation Agency (2015), Sin City: Illegal Wildlife Trade on Laos’ Golden Triangle Special Economic Zone (Washington DC) at: www.eia-international.org; J. Schweikhard, et al (2019) Investigations into the illegal wildlife trade in central Lao PDR (2019) TRAFFIC Bulletin Vol. 31 No. 1; Kanitha Krishnasamy et al (2018) Observations of illegal wildlife trade in Boten, a Chinese bordertown within a Specific Economic Zone in Northern Lao PDR 14 (2018) e0039014 at: https://www.sciencedirect.com/science/article/pii/S2351989418300052?via%3Dihub. Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 24 CHAPTER 1. ML/TF RISKS AND CONTEXT People’s Court and Supreme People’s Court: The People's Courts are the judicial branch of the 1 State, and they are responsible for adjudicating criminal cases, including ML cases. Office of Anti-corruption State Inspection Organisation: The State Inspection Authority, pursuant to Article 33 of the Law on State Inspection, has the responsibility to prevent and suppress corruption, including a role investigating predicate offences related to corruption. Enterprise Registration Office (ERO): ERO operates under the Ministry of Industry and Commerce and is responsible for the registration of all types of enterprises including legal (juristic) persons, partnerships and sole traders. Lao Securities Commission Office (LSCO): LSCO is a licensing, prudential and AML/CFT supervisory authority for securities companies. Ministry of Home Affairs (MOHA): MOHA is responsible for the registration and supervision of domestic NPOs. Department of Land, Ministry of Natural Resources and Environment: This Department is responsible for licensing and AML/CFT supervision of real estate trading agencies. Ministry of Planning and Investment (MPI): This Ministry is responsible for investment approval of businesses on the controlled list (which includes casinos)61 and the licensing of casinos (including in SEZs). Forestry Inspection Department, Ministry of Agriculture and Forestry (MOAF): MOAF is responsible for investigating forestry offences and related ML. Ministry of Technology and Communications (MOTC): Formerly the Ministry of Sciences and Technology, this Ministry is listed in Article 3 of the Decree on Entrust, as a responsible AML/CFT Ministry. The decree outlines its AML/CFT role and responsibilities are ‘implementing the activities of AML/CFT as defined in Article 4’. MOJ Department of Promotion Judicial System: This Department is responsible for licensing and AML/CFT supervision of law firms, MOJ Notary Department is responsible for notaries. Office of the Prime Minister: The Office of Prime Minister is responsible for approving investments in the controlled business list, concession investments and SEZ development projects. Ministry of Information, Culture and Tourism (MOI): The Heritage Department is responsible for licensing and AML/CFT supervision of dealers in valuable materials and antiquities which includes dealers in precious metals and dealers in precious stones. The Department of Mass and Culture within this Ministry has oversight responsibility for licensing and AML/CFT supervision of gaming devices (roulette and slot machines). 62 Ministry of National Defence: The Ministry’s responsibilities are defined in Articles 4 and 10 of the Decree on Entrust and includes investigating and interrogating money laundering offences. 61See Decree on the Approval of the Controlled Business List 62Regulation of the Minister of Information And Culture on Management, Inspection, and Permission for Game in the Lao PDR No. 664/MIC, Dated 22 October 2003 Anti-money laundering and counter-terrorist financing measures in Lao PDR 2023 25 CHAPTER 1. ML/TF RISKS AND CONTEXT Customs (MOF): Customs is responsible for cross-border control in accordance with relevant laws 1 and regulations. Internal Trade Department (ITD), Ministry of Industry Commerce: is responsible for licencing and AML/CFT supervision of dealers in precious metals and stones. Financial sector, DNFBPs and VASPs 52. Based on their relative importance and Lao PDR’s risk, context and materiality, implementation issues have been weighted most heavily for the banking and casino sectors, followed by real estate agents and DPMS. Implementation issues were moderately weighted for MVTS and foreign exchange bureaus, 63 MFIs and insurance, securities companies and lawyers. Lesser weight was applied to leasing companies, pawnshops, notaries and asset management companies. Financial Institutions 53. With total assets of commercial banks amounting to LAK 113,156.92 billion (USD 6.936B), banks dominate most financial sector activity in Lao PDR. Based on the nature of their ownership, products and services, and the volume of activity, they are vulnerable to abuse with respect to ML/TF. This vulnerability is compounded by the less-than-adequate quality of internal controls and the relatively low levels of AML/CFT awareness across the banking sector. Table 1.4: Financial Institutions in Lao PDR as at 2022 Financial Sector Number Assets held Banks Total 38 Total assets LAK 113,156.92 billion (USD 6.936 State-Owned Commercial Bank 1 billion) - 87.52% of GDP. Joint-State Commercial Bank 5 Private Bank 7 Figures from just prior to the Covid-19 pandemic show Subsidiary Bank 8 commercial banks held 38 percent of banking assets; Foreign Commercial Bank 16 foreign bank branches held 30 percent; private banks, Branch 14 percent; foreign bank subsidiaries, 7 percent; joint- Specialised Bank 1 venture banks, 8 percent; and specialized bank, 2 percent 64 Financial Institutions Total 166 Deposit taking 19 Non-deposit taking 111 Credit union and saving 36 Insurance Total 22 Insurance fees LAK 624,263.25 million (USD 38.27M) Life Insurance 4 Compensation fees (expenditure) LAK 172,424.91 General Insurance 8 million (USD10.57M) Combined Insurance 10 Remitters (MVTS) 3 Overseas outflows LAK 23.30 billion (USD 1.43M) Inflow transfers LAK 26.65 billion (USD

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