**RESULTS OF THE**

**FINANCIAL SYSTEMS ASSESSMENT TEAM VISIT TO YEMEN**

**MARCH 1-7, 2007**

**[EXECUTIVE SUMMARY]{.underline}**

A multi-agency Financial Systems Assessment Team (FSAT) conducted a
week-long, in-country evaluation of Yemen's capacity to combat money
laundering and terrorist financing, in order to determine its most
critical training and technical assistance needs on March 1-7, 2007.
Yemen is in the early stages of developing its capacity to control money
laundering. Interlocutors noted that the cash-intensive nature of the
economy, significant levels of corruption and problems in the judicial
system would be important factors to consider when developing training
and technical assistance programs related to terrorist financing, money
laundering and financial crimes.

The FSAT Team believes that there are a number of training initiatives
that should be pursued, particularly in light of the risks and
vulnerabilities related to the money-exchange service sector, the NGO
sector, corruption, and increased evidence of narcotics trafficking. The
team therefore recommends the following training initiatives: (1) legal
drafting assistance to ensure that the proposed new law meets
international standards and addresses the vulnerabilities identified in
this report; (2) additional training for the Central Bank's Anti-Money
Laundering Information Unit and field examiners in anti-money laundering
examinations and the detection of suspicious transactions, and

\(3\) basic Anti-Money Laundering Information Unit training and a
technical assistance visit by the Financial Crimes Enforcement Network
(FinCEN), followed by an exchange visit between the Central Bank's
Anti-Money Laundering Information Unit and FinCEN and/or the unit's
Spanish Counterpart, SEPBLAC (the Bank of Spain\'s Executive Service of
the Commission for Monitoring Exchange Control Offenses).

A Financial System Assessment Team (FSAT), consisting of Gary Novis
(State S/CT-Head of Delegation), Robert Stapleton (Department of
Justice, Asset Forfeiture and Money Laundering Section), Patricia
Handley (Federal Deposit Insurance Corporation), Jill Murphy (FBI-
Terrorist Finance Operations Section), Yamam Fadl (U.S. Treasury's
Financial Crimes Enforcement Network-FinCEN), Daniel Harris (U.S.
Treasury's Office of Terrorist Finance and Financial Crimes), and
Eugenio Garcia Jimenez (Spanish National Police- representing the
European Union) visited Yemen to determine its most critical training
and technical assistance needs to combat money laundering and terrorist
financing. The team met with a wide array of government and private
sector entities in

Yemen, including: The Central Bank, the Anti-Money Laundering
Information Unit, the Cabinet's National Anti-Money Laundering
Committee, the Political Security Organization (PSO), the Anti-Narcotics
Department at the Ministry of the Interior, the Attorney General's
Office, the Customs Authority, the Ministry of Social Affairs and Labor,
the Yemen Parliamentarians Against Corruption (Yemen PAC), the Tax
Authority, private financial institutions, the Yemen Bankers
Association, and representatives of the Foreign Affairs and
Constitutional Committees of the Yemen Parliament.

**[NATIONAL ANTI-MONEY LAUNDERING COMMITTEE]{.underline}**

The ROYG Cabinet's National Anti-Money Laundering Committee was
established in accordance with the provision of Anti-Money Laundering
(AML) Law No. 35. It is charged with combating money laundering and has
specific responsibilities established by Republican Decree No. 89 of
2006 regarding the Executive Writ for AML Law No. 35 of 2003 (AML laws).
The Committee meets three-to-four times a month. The Committee is
comprised of one representative nominated by each of the following:

\-- Ministry of Finance, who serves as Chairman

\-- Central Bank of Yemen Governor, who serves as Deputy Chairman

\-- Ministry of Justice

\-- Ministry of Interior

\-- Ministry of Foreign Affairs

\-- Central Organization for Control and Audit (COCA)

\-- Ministry of Industry and Trade

\-- Yemen Bankers Association

\-- General Union of Chambers of Commerce and Industry

Basic responsibilities of the Committee include developing AML-related
regulations, procedures and the suspicious transaction report (STR)
format; coordinating the exchange of information with the AML
Information Unit, Central Bank of Yemen (CBY), and international parties
on AML efforts; sponsoring training seminars and workshops for the
financial community; and representing Yemen in international Anti-Money
Laundering/Counter-Terrorist Financing (AML/CTF) fora, such as the
Middle East and North African Financial Action Task Force (MENAFATF).

According to the Committee, sources of money laundering in Yemen are
derived from corruption, arms smuggling, tax evasion, and child
trafficking. The extent of the hawala network or informal value transfer
system was assumed to be limited based on the marginal number of
expatriates. (The FSAT, however, was not able to quantify the extent of
the hawala network during any of our discussions.)

The Committee also has responsibility for legal drafting and as such has
drafted a counter-terrorist financing (CTF) law that reportedly combines
both AML and CTF elements and addresses all of the FATF 40 + 9
recommendations. The new law will criminalize terrorist financing by
individuals and organizations. The Committee indicated that the draft,
once approved, will supersede the existing AML laws. The draft was
reviewed by the Committee\'s legal team and representatives from the
United Nations to ensure it complied with international standards. The
draft needs to be further vetted and is expected to be presented to
Parliament for approval in mid-October 2007 at the earliest. The
Committee indicated that the UN resolution on narcotics trafficking and
organized crime was presented to Parliament for ratification. The
Parliament ratified the narcotics trafficking and organized crime
resolution on June 18, 2007.

In general, the Committee appears actively involved in advancing the
financial sector's ability to address potential risks associated with
money laundering and terrorist financing. However, it appears that the
Committee's efforts are not always effective. Specifically, the STR form
it developed does not appear to be effective. The STR form contradicts
the confidentiality requirement of the AML laws and includes a section
for the subject's signature; the form does not provide a narrative
section for describing the nature of the suspicious activity and
pertinent information relative to suspicious activity that would be
critical to the AML Information Unit (AMLIU) and law enforcement; and
the form requires limited information on the identification of the
subject be recorded. Apparently, the inclusion of the subject's
signature was an oversight and the banks were instructed not to obtain
the signature. Based on discussions with the Central Bank and AMLIU
staff, it appears that a revised STR form will be issued which will
address the shortcomings of the current form.

In addition to its current duties and responsibilities, the National
Anti-Money Laundering Committee is ideally placed to conduct a more
strategic approach to developing Yemen's AML/CTF regime. In particular,
it could develop a national strategic action plan for AML/CTF which
could provide productive guidance for the wide variety of public and
private sector entities that are responsible for reducing the
vulnerabilities and risks of money laundering, as they develop their
institutions, regulations, procedures and controls.

**[JUSTICE SECTOR]{.underline}**

The FSAT met with members of the Attorney General's Office, the Public
Prosecutor's Office, Yemen Parliamentarians Against Corruption (Yemen
PAC), and the Parliament's Foreign Affairs Committee to discuss the
justice sector's role in Yemen's AML/CTF regime.

**[Basic Structure and Criminal Procedure]{.underline}**

The Yemeni legal system represents a mixture of shari'a law and civil
code legal structure. There are three levels of courts: the court of
first instance, an appellate court and a supreme court.

**[Criminal Procedure]{.underline}**

A criminal case must go through a series of phases before it can be
brought to the court of first instance. During the initial investigative
phase of the case, law enforcement entities collect evidence pertaining
to the alleged crime. The case is then referred to the Public
Prosecutor, who continues the investigation. (Prosecutors are considered
judges. During this phase of the case, they act as prosecutors and
investigating judges.) If the prosecutor believes he needs additional
evidence to continue the case, he can refer the case back to law
enforcement authorities for further investigation. If the prosecutor
believes there is sufficient evidence to go to trial, he issues a
charging instrument, much like an indictment.

**[Limited Police Arrest Authorities]{.underline}**

Unless a crime is committed in plain view of a law enforcement agent,
Yemeni law enforcement authorities cannot arrest a suspect until a
prosecutor issues an arrest warrant.

However, this rarely happens until the Prosecutor issues the charging
instrument, which charges a person with committing a criminal offense.
Once the charging instrument/indictment is issued, the case goes before
a trial judge for a hearing.

After the trial, either the prosecution or the defense may appeal a
judge's ruling in a criminal case, but must do so within 15 days of the
judge's decision. A party may appeal procedural or substantive law
issues. It is up to the appellant to identify issues for appeal. If a
party undertakes a second appeal, the Supreme Court would hear that
case. The Supreme Court has the ability to decline to hear a case only
where it is permitted by law. In some instances, cases are referred by
law to the Supreme Court without either party appealing a ruling.

**[Justice Sector's Role]{.underline}**

The Public Prosecutor does have a few specialized units, such as one for
terrorist crimes, public funds (corruption), juvenile, traffic, and jail
administration; however, there is not a specialized unit that handles
money laundering or other financial crimes outside of corruption.

The ROYG enacted Law Number 35 criminalizing money laundering in 2003.
This law, however, does not meet many international standards. To date,
no one has been prosecuted for money laundering under this law.
Currently, there is no law that criminalizes terrorist financing. Yemeni
officials told the FSAT that the ROYG is currently working on a draft
anti-money laundering and counter-terrorist financing law with the help
of the United Nations Office on Drugs and Crime (UNODC), the IMF and the
World Bank. The National Anti-Money Laundering Committee (NAMLC) is
responsible for drafting this law. Once it submits the draft to the
Parliament, three committees will review it: the Foreign Affairs
Committee, the Financial Affairs Committee and the Constitutional
Committee. ROYG officials asked the FSAT to review the current drafts
and stated that they are open to any recommendations or suggestions that
may help the law meet international standards.

Under the current legal regime, there is no law enforcement agency with
specialized skills or authorities to pursue money laundering
investigations. It appears that any law enforcement agency may initiate
a money laundering investigation, although most Yemeni officials appear
to think that such investigations will not be initiated through law
enforcement investigations, but rather through work and initiatives of
the AML Information Unit.

In terms of technical assistance and training needs, the Yemeni legal
system could benefit from assistance with regard to ethics training for
employees, enhanced administrative techniques, case development, and
interagency cooperation. It was patently clear that, at the time of this
assessment, money laundering was a very difficult concept for most legal
staff to comprehend fully.

One systemic problem with respect to AML/CTF is that under the current
legal system, Yemeni defendants can be charged with numerous offenses,
but they can only be convicted of one crime. The conviction is usually
for the crime with the harshest penalty, whereas money laundering and
similar offenses are most effective when they can be charged separately
or as an additional offense. The FSAT was not able to determine whether
under the current AML law the prosecution must first obtain a conviction
for a predicate offense before gaining a conviction for money
laundering. This may be a moot point, however, because the defendant can
only be convicted of one crime arising from the same set of facts.

Due to the lack of experience, adequate infrastructure and widespread
corruption throughout the law enforcement and legal system, it does not
appear the ROYG understands how to initiate a money laundering
investigation. Indeed, it appears that ROYG authorities rely heavily on
received accusations, rather than pro-active law enforcement activity.
All investigators, prosecutors and judges could, therefore, benefit from
basic (i.e. anti-money laundering) investigative training.

The ROYG has a forfeiture system in place, but a judge must order the
forfeiture for the items involved in or proceeds from the crime for
which the defendant was convicted. Forfeiture is available for all
crimes and extends to funds and property. Authorities deposit forfeited
funds into the general treasury, unless the funds are the proceeds from
a drug offense, in which case the proceeds go to law enforcement
authorities, who can use the proceeds to buy vehicles or other
equipment. If the court orders a defendant to forfeit property, the
judge issues an order to auction off the property to the public, with
the funds from the auction going into the general treasury. ROYG
authorities said they could forfeit real property because there are no
laws prohibiting them from doing so, but admitted they have not yet done
so. In some instances, however, the courts can order real property, such
as a dwelling, to be closed for one year before the owner may use it
again.

The FSAT also met with Yemen PAC, a group of Parliamentarians working to
combat corruption in Yemen. They are currently working to improve the
Anti-Corruption Law in

Yemen and are in the process of creating an Anti-Corruption Board. There
is also a new law that will soon go into effect that will require ROYG
officials and employees to provide financial disclosures, but these
disclosures will not be available to the public. This group is devoted
to conquering the problem of corruption in Yemen and is quite aware of
the problems Yemen faces with regards to corruption. In this respect, an
AML law that meets international standards and that includes provisions
for financial investigations, a functioning AML Information Unit, and an
improved asset forfeiture system could help Yemen PAC and ROYG officials
to reduce corruption.

The FSAT also met with the Parliament's Foreign Affairs Committee to
discuss the importance of the draft AML/CTF bill it will soon receive
for review and approval. The Committee was very keen on discussing
issues related to the ratification of the UN Convention to Suppress
Terrorist Financing and the number of problems they have with the
Convention. The FSAT relayed to the Committee the need for passage and
implementation of an AML/CTF law that meets international standards and
the positive effects such a law could have on Yemen's economy.

**[ANTI-MONEY LAUNDERING INFORMATION UNIT]{.underline}**

Law No. 35/2003 created the Anti-Money Laundering Information Unit
(AMLIU) as Yemen's financial intelligence unit (FIU). The AMLIU consists
of three members: a chairman, a legal expert and a technical expert for
verifications.

The AMLIU is housed within the Central Bank of Yemen (CBY), and provides
the CBY with both financial and administrative support, including legal
and regulatory personnel. However, the AMLIU claims that it is
technically independent from the Central Bank since it is not required
to report to the CBY. According to its organizational structure, the
AMLIU can share information with, but does not necessarily report to,
the following three entities: the Central Bank Governor, the National
Anti-Money Laundering Committee (NAMLC), and the Deputy Governor for
Banks.

The AMLIU receives suspicious transaction reports (STRs) from banks,
money exchangers, insurance companies, stocks and bonds companies, and
financial real estate leasing companies. STRs are delivered to the AMLIU
by a courier, with an authorized signature required upon receipt. There
is no specified time limit for filing STRs to the AMLIU.

The AMLIU received two STRs from financial institutions in 2005, and
three STRs in 2006. In 2007, the AMLIU has so far forwarded one
suspicious case to the Office of Public Prosecution for suspected money
laundering. Once the AMLIU receives the STR, it reviews all the
information and supporting documentation contained within the report. If
there are any missing data from the STR or supporting documents, the
AMLIU may request additional information directly from the bank or
conduct an onsite visit. The AMLIU then determines whether the case is
of a criminal nature. The AMLIU forwards criminal cases to the Office of
Public Prosecution for further investigation. The AMLIU itself does not
have an investigative capacity. The AMLIU has one member with
investigative experience, but needs additional capacity-building
training.

The AMLIU is divided into three separate divisions: investigations,
analysis and legal monitoring, and information technology. The
investigations division serves more as a verification function, rather
than an investigative function, and conducts field visits to financial
institutions. The analysis and legal monitoring division receives and
analyzes the STRs, and reports those cases to the Office of Public
Prosecution. The information technology division collects and compiles
all data received into an electronic database, and shares information
with other government agencies.

The AMLIU faces several challenges with its efforts to combat money
laundering and terrorist financing. The general lack of AML/CTF
awareness, as well as formal training in AML/CTF detection, are its
foremost challenges, for which the AMLIU has requested immediate
assistance. Other challenges that impede the AMLIU's efforts include:

\(1\) the corruption and embezzlement of public funds, which they claim
are rampant throughout the country; and (2) terrorist acts conducted by
highly skilled terrorist groups. Another challenge to the effectiveness
of Yemen's AML/CTF regime is the high degree of cash being circulated in
the informal banking sector (approximately 60-80% of total funds).

The AMLIU is in need of fundamental training and technical assistance in
the following areas: (1) detecting suspicious activity in financial
transactions; (2) analyzing suspicious transaction reports once they are
received; and (3) creating an electronic database of all STRs and
related information within the AMLIU in order to conduct future link
analysis. As a first step, an analytic exchange with FinCEN is
recommended in the near future in order to provide the Yemenis with a
better understanding of a fully functional AMLIU, as well as a general
overview of AMLIU operations in each of these specified areas.

**[DEVELOPMENT OF THE FINANCIAL SECTOR]{.underline}**

Yemen's financial sector is rudimentary as Yemen is predominantly a
cash-based society. Officials insist that the financial sector is not
conducive to money laundering due to the poor economic factors and the
limited capital of Yemeni banks. However, officials also reported a 35%
growth rate in domestic bank deposits in 2006 compared to a 28.5% growth
rate by Arab and foreign banks operating in country. Also, reports
indicate that Yemen banks' revenues were 360 billion Yemeni Riyals (USD
1.8 billion) in 2006; and deposits reached 214 Yemeni Riyals (USD 1.1
billion), with capital of 854 Yemeni Riyals (USD 4.3 billion) by
year-end 2006.

Officials indicated that several initiatives have been planned in order
to attract more of the population into the formal financial system:
deposit insurance on accounts; direct deposit of ROYG payroll into bank
accounts; expansion of the ATM network; and the offering of Treasury
Bills. On 03/06/2007, members of the team accepted an invitation from
the Chairman of the Cooperative & Agricultural Credit Bank (CAC Bank) to
view its state-of-the-art Visa Card operations facility at the main
branch in Sana'a. The bank's initiative to expand services to the
non-banking community and promote trust and reliance in electronic
payments systems indicates a degree of financial sophistication and
progress. All of these trends indicate increased penetration by the
financial sector into the cash economy as the banks and others begin to
pursue the non-bank market. It is therefore critical that anti-money
laundering regulations and controls be implemented at a similar pace to
avoid the risk of an unregulated sector.

**[Regulatory Framework]{.underline}**

The current AML law established a number of institutions such as the
AMLIU and the National AML Committee, and listed various money
laundering offenses, which do not include terrorist financing or tax
evasion. The AML law levies a number of regulatory and other
requirements on financial institutions (i.e. banks; money exchanges; and
companies - funding, insurance, securities, financial leasing, and real
estate) although the CBY's supervision is limited to banks and money
exchanges. Financial institutions are required to develop formal
procedures that address the following:

\-- A formal compliance program that includes training, testing for
compliance, and the designation of an experienced individual responsible
for ensuring compliance (i.e., the Compliance Officer).

\-- Customer identification. Financial institutions are required to
record, verify, and retain customer identification/basic information in
order to determine the true beneficiary. The required form of
identification to open a bank account and apply for other social
benefits is the National Identification Card. It contains a person's
photograph and fingerprint, and reportedly is difficult to duplicate.
Accounts include deposit/transaction accounts, loan and credit accounts,
and safe deposit boxes. Customers include individuals, legal persons,
public companies, and non-profit organizations (e.g., NGOs).

\-- Prohibitions on opening anonymous accounts and foreign
correspondence accounts for any person prior to ratification of the
signature from the correspondent bank in the country at which said
person resides.

\-- Payable upon proper identification (PUPID). Non-customers or PUPIDs
initiating

or receiving funds transfers exceeding USD 10,000 or its equivalent in
any other

currency are required to provide proper identification, address,
occupation, and

information on the true beneficiary.

\-- Retention of certain financial records for five years.

**[CENTRAL BANK OF YEMEN (CBY)]{.underline}**

The CBY was established in 1971 and merged with the Bank of Yemen when
the north and south united in 1990. Its main functions include monetary
policy; currency issues; management of the official reserves; serving as
the bankers, bank and bank to the ROYG; and supervision of the banking
system. It supervises 17 commercial banks in the country, four of which
are Islamic. Staffing includes 20 examiners. In addition, the CBY has
authority over the 448 money exchanges that reportedly consist of 20
major exchanges.

However, the supervision of money exchanges is limited to off-site
reviews of financial and compliance records provided by the money
exchanges to the CBY. Typically, CBY examiner on-site reviews are
limited to banks.

The banks are examined at least once annually and reports are issued
after each examination. Technically, the CBY has the authority to
implement enforcement action, but in practice, it provides training to
improve inadequacies noted. CBY admitted that banks/money exchanges
still need time to implement compliance requirements. A meeting with a
group of private bankers indicated that compliance with the AML laws has
been a slow process. Compliance programs have been developed and
implemented one at a time such as the \"Know Your Customer\" programs,
which are designed to ensure customer identification and basic
information is recorded, verified and retained. The bankers admitted
that developing effective suspicious activity programs and procedures
has been difficult as more training is needed to better understand the
concept of suspicious activity. In addition, the bankers indicated that
the Bankers Association has done little to assist with AML compliance
issues to date.

The formal examination procedures used to test the bank's compliance
with the AML laws are too limited to be effective. The procedures
consist of approximately 12 questions relating to the existence of a
compliance program, compliance officers, training programs, and reports
of cash transactions over USD 10,000. The procedures are not
comprehensive and do not provide for an assessment of the aforementioned
elements and transaction testing to quantify the level of compliance.

**[UNSCR 1267 Compliance]{.underline}**

In response to UNSCR 1267 in September 2003 and the Yemen's Council of
Ministers' directives, the CBY has issued a number of circulars (most
notably 75304 and 75305) to all banks operating in Yemen, directing them
to freeze the accounts of 144 persons, companies and organizations on
the 1267 consolidated list, and to report any findings to the CBY. The
CBY has issued updated circulars to banks after updated 1267 information
is passed from the Yemeni Embassy in Washington or Consulate in New York
through the Ministry of Foreign Affairs and is voted on by the Cabinet.
However, it takes approximately one month for the list to be distributed
by the Yemeni Embassy in Washington, D.C., reviewed by various
ministries in Yemen, and received by the CBY. The CBY hand delivers the
list to its financial institutions. To date, only one report on a
blocked account has been filed, which was hand-delivered by the bank to
the CBY. In addition, Yemen has yet to take any action against or freeze
the assets of Sheikh Abdul Majid Zindani, despite his February 2004
addition to the 1267 list.

**[CBY'S CHALLENGES AND VULNERABILITIES]{.underline}**

The primary challenge affecting the CBY's ability to ensure compliance
with AML laws is the lack of adequate technical training. The CBY
indicated that it provides bank and money exchange training in an
attempt to improve compliance and in lieu of implementing enforcement
action for non-compliance. However, it is alarming that the individuals
providing the training are not adequately trained and do not appear to
have sufficient expertise to conduct the training. In addition, the
current AML laws are not comprehensive, and the implementation of
existing AML laws and minimum international standards on AML/CTF (i.e.,
FATF recommendations and UNSC resolutions) are ineffective. Banks are
still in the process of implementing and understanding AML issues. The
CBY lacks proven enforcement authority, and the level of non-compliance
with AML laws has not been quantified.

The financial sector appears vulnerable to exposure to ML/TF schemes
from certain persons and entities of heightened risk and through the use
of certain products/services, specifically funds transfers. There are no
requirements to declare currency and its equivalent at border crossings
or to report large currency transactions, and no safe-harbor provision
exists relative to the filing of STRs.

The CBY indicated it is vulnerable to corruption and terrorism. The
embezzlement of public funds is rampant, and terrorist groups have a
myriad of ways to smuggle funds across the country's porous land and sea
borders. Enforcement of the AML laws is questionable based on the level
of corruption.

Other identified weaknesses include the following:

The AML laws are not comprehensive and do not address international
minimum standards. For example, the AML laws do not incorporate the
following:

a\) All provisions of Recommendation 5 from the Financial Action Task
Force on Money Laundering\'s List of Recommendations, specifically
conducting on-going due diligence on business account relationships and
scrutiny of transactions to ensure that the transactions are consistent
with the customer's known risk profile.

b\) Recommendation 6 relating to Politically Exposed Persons (PEPs).

c\) Recommendation 7 relating to correspondent bank relationships.

d\) Recommendation 14 relating to confidentiality of STRs. Although the
AML laws address the recommendation, in practice the STR form allows for
the subject's signature in contravention of the AML laws.

e\) Recommendation 15 relating to compliance programs to combat
terrorist financing.

f\) Recommendation 18 relating to the prohibition of shell banks.

There are no CTF laws. According to the Committee, a law has been
drafted and needs to be vetted by several ministries before it is
presented to Parliament. The Committee recognizes the proposed CTF law
will not be approved before the mutual evaluation in July 2007, and
indicated it would not likely be approved for another six months after
that. Although there is some indication that Yemen has provided for
international cooperation and review of non-profit organizations to some
degree, the FATF Special Recommendations on Terrorist Financing have not
been implemented. In addition, UNSCRs 1267 and 1373 are not addressed in
statute, although the CBY did issue a circular relative to UNSC
resolution 1267. However, the procedure in place does not appear to
satisfy the \"freeze without delay\" provisions, due to delays in
notification. Abdo Hezam Saif, Head of the Central Bank\'s AMLIU, told
AMEMB Yemen on July

22, 2007 that a joint technical committee (which was formed from the
National Anti-Money Laundering Committee and the Central Bank\'s AMLIU)
completed the draft CTF law, is making minor amendments to it, and will
forward it to the Cabinet by mid-August 2007, which will later forward
it to Parliament when Parliament reconvenes in mid-October 2007 at the
earliest.

The training provided has not been effective. Two CBY members attended
the International AML/CTF Training in Arlington, VA in September 2006.
Conversations with the CBY confirmed that these individuals did not
subsequently train other CBY personnel and the banking and money
exchange communities. However, CBY indicated that at least one of the
individuals will serve as a training instructor at the Yemen Bankers'
Association. One of the individuals works in the AMLIU and the other
works in Supervision. CBY indicated that the individuals were
overwhelmed by the scope and complexity of the training course, and also
expressed difficulty in comprehending the materials in English.

Money exchanges are largely unregulated. Although they are required to
be licensed by the CBY, the level of supervision is nominal. The money
exchanges are not subject to the same examination process as banks.

There are no reporting requirements for currency transactions, currency
exchanges, monetary instruments, and funds transfers that are conducted
by customers of the financial institutions.

Suspicious activity and reporting thresholds are not defined.

The number of STRs filed is not commensurate with the perceived AML
risks. Since the inception of the AML laws, the financial institutions
have filed only six STRS: two in 2005; three in 2006; and one
year-to-date. Although the latter STR is in the process of review, the
other STRs were not referred to the Public Prosecutor and none were
filed by the money exchanges.

Customer due diligence is limited to identification procedures. There
are no requirements to record and understand the customer's source of
funds and expected transactions, which would enable the financial
institution to detect patterns and trends of suspicious activity.

Potentially high-risk persons/entities and products/services are not
addressed. The identification, enhanced due diligence, and on-going
monitoring of certain customers (e.g., Politically Exposed Persons,
Professional Service Providers, cash-intensive businesses) and
products/services (e.g., private banking accounts, funds transfers)
would better enable the financial institutions to detect patterns and
trends of suspicious activity.

**[RECOMMENDED TRAINING AND TECHNICAL ASSISTANCE]{.underline}**

**[Training]{.underline}**

Basic AML/CTF training is required. Training should be provided to CBY
examiners, AMLIU employees, and perhaps to representatives of the
National AML Committee and Yemen Bankers' Association. The training
should be disseminated to the financial community to ensure they are
aware of AML/CTF efforts and best practices.

CBY indicated its two primary training needs relate to cyber crimes and
terrorist financing detection and techniques used by groups. The
Committee indicated its two primary training needs relate to
investigating and tracking funds and AMLIU systems development.

The content of the STRs was discussed with the CBY in a follow-up
meeting held on 03/06/2007. AMEMB Yemen provided the CBY with a copy of
FinCEN's Suspicious Activity Report form and instructions in an attempt
to assist in developing a new enhanced STR form. In addition, a copy of
the Federal Financial Institutions Examination Council's Bank Secrecy
Act/AML Examination Manual was provided to illustrate the extent to
which examination procedures should be developed and implemented.

An offer should be extended to review the CBY's AML/CTF examination
compliance program (i.e., procedures and workpapers) to ensure it is
comprehensive and effectively implemented through analyses, assessments,
transaction testing, and sampling techniques.

The AML Committee was interested in having the newly drafted AML/CTF
decree reviewed before it is presented to Parliament. Upon translation
and study, the USG should provide comments with respect to how well the
legislation comports with international standards, as well as
recommendations to bring legislation into compliance with international
standards.

**[NGOs]{.underline}**

Act. No. 1 of 2001 governs non-governmental organizations (NGOs) under
the authority of the Ministry of Social Affairs and Labor (MOSAL), the
ministry responsible for oversight of charitable NGOs in Yemen. MOSAL
has four directorates: Associations, Institutions, Cooperatives and
Finance. MOSAL also has 22 regional offices in Yemen. These offices
conduct site field visits and regular inspections, request reports and
occasionally attend NGO meetings.

In Yemen, all NGOs belong to one of two categories. The first is an
association. An association is open and has elections. The second type
of NGO is a private foundation.

A foundation is created by a donor or group of donors using their own
funding sources. In the case of a foundation, the donors control the
operation of the NGO. The financier controls the sponsored NGO.

According to the law, contributions, gifts, and aid require prior
approval following verification of the legal source. Penalties for
infractions may range from fines to imprisonment and are theoretically
imposed on any individual that misrepresents the licensed mission and
mandate of the organization or engages in fraud. Act No. 1 places
responsibility for NGO oversight throughout Yemen in the hands of MOSAL.
NGOs are required to submit an annual report on their financial
activities to MOSAL. Periodic field surveys are also conducted by the
Ministry. NGOs are subject to auditing by the Central Organization for
Control and Audit (COCA) under Act No. 38 of 1992. NGOs with accounts in
excess of one million Yemeni Riyals (USD 50,000) yearly must be audited
by a certified independent legal accountant under the implementing
regulations of Act 1.

The CBY, in cooperation with MOSAL, has adopted precautionary procedures
with regards to opening and management of charitable accounts. These
procedures were passed to NGOs in the form of Circular No. 33989 (June
2002) and Circular No. 91737 (November 2004).

MOSAL, however, only has modest control over the NGOs in Yemen. The
current laws are very open and don't provide for centralized oversight
and controls over NGOs by MOSAL. Amendments to the current law are being
considered which would provide for more centralized oversight and
control by MOSAL. For the amendments to be effective, they will have to
receive the support of Parliament, which has been problematic in the
past as several MPs are also involved in charities/NGOs. In addition,
MOSAL is constrained by limited staff (15-20 personnel devoted to
compliance/monitoring).

The staff must vet dozens of requests for the establishment of new NGOs
every month. Timeliness of vetting is an issue, since by law these
requests have to be addressed within 30 days or the NGO will
automatically be granted legal status.

Yemen has not designated HAMAS or Palestinian Islamic Jihad as foreign
terrorist organizations. Both organizations maintain offices in Yemen
and use them as bases to conduct fundraising. In conversations with the
ROYG Parliament's Foreign Affairs Committee and Post, Yemen remains
vigilant in its support for the resistance in the West Bank and Gaza. It
is unlikely that Yemen will take any actions to uproot the presence of
such organizations in the near future.

**[Financial Aspects of NGO operations]{.underline}**

Foreign nationals are not permitted to establish/register NGOs in Yemen.
International NGOs, however, are allowed to operate in Yemen. In
addition, foreign nationals can coordinate with international NGOs and
foreign donors to gain financial support for local initiatives.
According to MOSAL, the majority of contributions to NGOs in Yemen come
from foreign donors, who mostly contribute through payment in kind and
not cash. MOSAL believes only a small portion of donations is diverted
from NGOs for nefarious purposes. Without accurate control measures or
staff to conduct proper audits, it is hard to substantiate this claim.

Currently, NGOs can freely transfer funds into or out of Yemen; the only
requirement is that NGOs must notify MOSAL. (NGOs do not need the
permission of MOSAL to transfer funds.) Yemeni charities are required to
have one bank account opened through MOSAL. Persons with signature
authority are also coordinated through MOSAL.

MOSAL cannot freeze or close accounts when violations occur. They must
go through judicial channels to freeze or close accounts. Over a year
ago, it was determined that

1,500 NGOs violated their legal status. MOSAL has filed paperwork to
have these NGOs dissolved, but this has not yet occurred.

MOSAL has a database where all information is stored. Currently, this
database can communicate only between the main office of MOSAL and five
regional offices.

Training:

\-- MOSAL could benefit from training on the legal and operational
aspects of international money transfers as well as from auditing and
financial investigative training for its compliance and control staff.

\-- MOSAL could also benefit from technical assistance in completing its
centralized database.

\-- NGOs need to be educated and trained on their financial auditing and
reporting

requirements.

\-- MOSAL may benefit from the translated version of U.S. Treasury's
revised \"Best Practices for NGOs and Charities for Distribution.\"

\-- MOSAL would also benefit from translated copies of the FATF's and
the MENA

FATF's best practices papers on NGOs.

**[MONEY EXCHANGE BUREAUS]{.underline}**

There are approximately 448 registered money exchange businesses in
Yemen, who primarily serve to exchange currencies and transfer funds.
According to informal discussions, obtaining a business permit to open
and operate a money exchange business is extremely easy. The process
involves filling out an application and then undergoing some type of
review before the permit is issued. There are two types of money
transfer businesses. One type is used by individuals and the other type
is for commercial customers. The money transfer businesses can register
for one permit type, but can open offices at several locations. The
transfer of funds over USD 10,000 or more requires the permission of the
Central Bank.

The official who oversees regulation of the money exchange businesses
maintained that there was no problem in regulating this sector. However,
the Central Bank noted that it has not yet begun to examine this sector
for AML compliance.

Estimates suggest that somewhere between 60-80 percent of the population
does not use the formal banking system. As a result, the majority of
individuals use the informal banking system, specifically, alternative
remittance systems and money exchangers. The CBY has issued circulars to
money exchangers outlining policies for all transfers over USD \$10,000.

Over three million Yemenis live outside of Yemen and rely on various
informal value transfer systems to transmit money back to Yemen. These
remittances are extremely important in supporting the Yemeni economy,
but it is unclear if and how most of them are regulated. The CBY claims
to have oversight over the 20 largest money exchangers and will conduct
spot inspections. The CBY also requires that money exchangers file
financial reports to them annually.

Given the fact that the CBY has not yet begun systematic examinations of
this sector for compliance and the risks that the money exchange sector
presents globally, it is important to ensure that the CBY is properly
trained and begins to conduct examinations and audits of this sector.

**[CUSTOMS]{.underline}**

The Customs Authority (CA) is responsible for controlling all persons
and goods entering and leaving Yemen. The CA has inspection, detention
and investigative authorities, which is unique in the region. The CA's
Inspection Directorate is responsible for smuggling, money laundering
and other related issues.

The CA, however, does not have a specialized Inspector Corps; rather,
Customs officers are rotated through various positions and directorates.
While the CA has the authority to detain goods, it currently does not
use financial tools or investigations to pursue bulk cash smuggling or
trade-based money laundering, which were both identified as areas of
high risk. Most investigations are initiated from tipoffs, and in many
cases officers are subjected to bribery attempts.

The CA does not currently have either an inbound or outbound reporting
requirement, but it does collect standard trade and shipping data.

Yemen has 1,906 km (1,184 miles) of sea borders and 1,746 km (1,085
miles) of land borders with Saudi Arabia and Oman. The borders are
largely unguarded and smuggling is rampant. While the CA, with 2,100
employees, maintains 25 entry points (by air, land and sea), it is clear
that its reach is extremely limited. Smuggling is rampant along Yemen's
sea border with Oman, across the Red Sea from the Horn of Africa and
along the land border with Saudi Arabia.

Yemen engages in both bilateral and multilateral agreements with its
neighbors to share information on regional security concerns (e.g., Arab
Convention on the Suppression of Terrorism, and the Convention of the
Organization of the Islamic Conference on Combating International
Terrorism). In addition, the CA claims to keep particular watch on
specific individuals of concern, as well as monitoring flows of money
and goods to and from specific countries of concern.

The intelligence service, the Political Security Organization, and CA
agree that the threat of terrorist financing and money laundering exists
largely through cash couriers. At present, Yemen has no cash
declarations or disclosure requirements into or out of the country.
According to the CA, a cash declaration form exists, but it is used only
after money has been discovered by Customs authorities at the border.

Corruption and bribery are rampant in Yemen. The CA is encouraged by the
idea of providing incentives for border seizures, but given the high
levels of corruption across all levels of Yemeni society, it is unclear
how such a system can be conducted in a transparent manner.

**[Training Opportunities]{.underline}**

If and when Yemen institutes outbound and inbound reporting of cash and
bulk couriers, training should be considered. Alternatively, training
could be conducted on how to set up a cash courier regime.

Joint training would be most beneficial for CA, with other agencies such
as the Coast Guard working border control issues. They could benefit
from training in interviewing and basic investigative techniques. In
particular, the CA could benefit from training on how to identify \"red
flags\" for individuals who should be selected for closer scrutiny
either entering or departing Yemen.

The CA also requested information regarding incentive programs for
officers to apply the law properly and to encourage citizens to report
violations.

**[TAX AUTHORITY]{.underline}**

The Tax Authority (TA) includes a directorate responsible for tax
evasion. The TA noted that Yemen has both a corporate income tax and a
sales tax. The TA has been working to reduce tax evasion through a
program of reducing overall tax rates, instituting exemptions, and
increasing the tax requirements on businesses, who pay the bulk of
Yemeni taxes.

As in the case of other ROYG law enforcement agencies, the TA does not
currently have the capacity to conduct financial investigations or apply
financial tools in its efforts to combat tax evasion. For example, the
TA noted that in the case of tax evasion related to cigarettes, it will
intervene only at the last point of sale (after receiving a tip). For a
first offense, a warning will be issued. Afterwards, a series of
graduated fines is applied

(e.g., four times the tax). Although the law provides for a jail term of
six months, this penalty has never been applied.

There is no current capability in the TA to conduct financial
investigations to determine who else might be associated with tax
evasion, locate the illicit proceeds, or identify, freeze, and seize
assets related to tax evasion.

**[Training Opportunities]{.underline}**

The TA would benefit from forensic accounting and financial
investigative training (including the use of net worth analysis).

**[CONCLUSION AND RECOMMENDED TRAINING]{.underline}**

Yemen is currently in the initial stages of developing an anti-money
laundering and counter-terrorist financing regime. A number of other
factors must also be considered in considering AML/CTF training for
Yemen. These include the lack of a law that meets international
standards, the need for systemic legal reform and limited AML/CTF
institutions.

In addition, the FSAT team noted a number of areas of concern that
should continue to be monitored. These include: a largely unregulated
money exchange service sector including both currency exchange and fund
transfer services; limited capacity to monitor and control risks in the
NGO sector to terrorist financing and financial fraud; and a non-bank
informal banking sector that is in the beginning stages of increasing
bank penetration. In addition, there are bureaucratic delays in
implementing UNSCR 1267.

Resources permitting, the FSAT team, however, believes that training at
the appropriate level is both feasible and recommended. The FSAT
believes that initial efforts should focus on the Central Bank and the
AMLIU. In particular, FSAT recommends that initial training should be
concentrated on the areas outlined below.

Legal Drafting Assistance: Several interlocutors stated that they would
welcome U.S. comments on the proposed new law to ensure that it meets
international standards. Comments could be sent from Washington via
official channels, with an additional on-site consultation/stakeholder
meeting if necessary.

Financial Examinations: Additional training on how to conduct anti-money
laundering examinations for the Central Bank and the AMLIU would be
extremely beneficial in promoting ROYG's overall AML/CTF efforts (this
is an intensive one-week practical examination-based course designed to
train trainers). Training is conducted in Washington and is generally
limited to 4-6 persons per country.

Training in Detection and Reporting Suspicious Transactions: This
training could be conducted as either a stand-alone course or as part of
the Financial Examination course referenced above.

In addition, the Government of Spain and the EU may be receptive to a
similar visit to the Spanish Financial Intelligence Unit (SEPBLAC). This
should be pursued in addition to the FinCEN visit.