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2006 * International Narcotics Control Strategy Report

US DEPARTMENT OF STATE
US. DEPARTMENT OF STATEInternational Narcotics Control Strategy Report, 2006

Released by the Bureau for International Narcotics and Law Enforcement Affairs, U.S. Department of State - Washington, DC, March 2007




AFGHANISTAN

Part I: Drug and Chemical Control


Afghanistan

Afghanistan

I. Summary

Afghanistan remained the world's largest producer of opium in 2006, cultivating 172,600 hectares of opium poppy according to USG estimates. This equates to 5,644 metric tons of opium, up from 4,475 metric tons in 2005. The export value of this opium harvest, $3.1 billion, was approximately one-third of Afghanistan's combined licit and illicit GDP of $9.8 billion according to the UNODC. Approximately 25 percent of the opium's value, $755 million, was paid to farmers, with the rest going to the narcotics traffickers. Afghanistan's huge drug trade undercuts efforts to rebuild the economy and to develop a strong democratic government based on the rule of law. There is strong evidence that narcotics trafficking is linked to the Taliban insurgency. These links between drug traffickers and anti-government forces threaten regional stability. Corruption and dangerous security conditions constrain government and international efforts to combat the drug trade and provide alternative livelihoods. President Karzai appointed a new Chief Justice of the Supreme Court and a new Attorney General in 2006, who has taken initial steps to combat corruption.

The international community assists the GOA in its efforts to develop institutions capable of combating opium cultivation and trafficking. The GOA focuses on an eight-pillar strategy that includes Public Information, Alternative Livelihoods, Law Enforcement, Criminal Justice, Eradication, Institutional Development, Regional Cooperation, and Demand Reduction. The United States complements the GOA's strategy with a five pillar strategy that consists of Public Information, Alternative Livelihoods, Law Enforcement/Justice Reform, Elimination/Eradication, and Interdiction, which are the focus of U.S. government assistance. The GOA's Poppy Elimination Program (PEP), developed in 2005 in seven major poppy-growing provinces, engaged in its first full year of activity and is becoming a trusted institution for disseminating information to farmers and the general public about the risks of cultivating opium poppy and the availability of alternative livelihoods. The GOA also focused on building capacity within its law enforcement and justice sector institutions to increase arrests, prosecutions, and convictions of drug traffickers.

The large increase in poppy cultivation in 2006 spurred the GOA to take stronger action in discouraging farmers from pursuing opium crops. In August 2006, the Ministry of Counter Narcotics organized a national conference on counternarcotics, marking the ministry's first effort to initiate and plan a nationwide event. President Karzai used the conference as an opportunity to press provincial governors to take responsibility for reducing and eliminating opium production in their regions of control. During the 2006 pre-planting and planting season, the GOA built on this message and informed provincial and district governors and chiefs of police that the government would hold them accountable for pursuing an active pre-planting information campaign that reduces poppy cultivation. The Minister of Interior dismissed some district-level officials due to their failure to implement the pre-planting campaign. Opium cultivation is hard to deter since an infrastructure is in place to finance farmers and market what they produce. No other current crop has a combination of features - reliably high price, financing, and ready marketability - to compare with opium cultivation. In order to make sustained progress in combating narcotics trafficking, the GOA will need to continue to extend credible governance throughout Afghanistan's provinces and districts and demonstrate its ability to enforce the rule of law across the country. This will require international and political support over many years.

II. Status of Country

Afghanistan produced more than 90 percent of the world's opium poppy during 2006, and it is the world's largest heroin producing and trafficking country. Afghan traffickers trade in all forms of opiates: unrefined opium, semi-refined morphine base, and refined heroin. An increasing share of Afghanistan's opium is refined into morphine base and heroin in Afghanistan itself. The GOA's Central Statistics Office estimated Afghanistan's licit GDP (excluding illicit opium activity) as $6.7 billion in 2006. UNODC estimated the export value of the country's illicit opium at $3.1 billion (farm-gate value plus trafficking proceeds) for the same time period. Opium represented roughly one-third of Afghanistan's total GDP (licit and illicit). The $755 million farm gate price paid to farmers represented 8 percent of total licit and illicit GDP. Reconstruction efforts that began in 2002 are improving Afghanistan's infrastructure, providing the necessary foundation for more effective efforts to combat the cultivation and trafficking of drugs throughout the country, but this is a slow process that will take years. Crime financiers and narcotics traffickers will continue to exploit the government's weakness and corruption.

III. Country Actions Against Drugs in 2006

Policy Initiatives. The United States, with the United Kingdom, continues to work to ensure that counternarcotics is at the forefront of Afghan policy initiatives. President Karzai has reiterated his commitment to stemming drug production and trade in Afghanistan, publicly stating that drugs are Afghanistan's biggest threat. In January 2006, the GOA presented an update to its National Drug Control Strategy (NDCS), which lays out a five-year plan for strengthening the GOA's ability to control narcotics production and trafficking. In October 2006, the GOA formalized the NDCS with detailed implementation plans for each of the pillars identified in the strategy. The GOA took the following actions in support of the NDCS during the year:

-- Illicit Crop Control - The GOA's Poppy Elimination Program (PEP), established in 2005, became operational in seven of Afghanistan's largest poppy-producing provinces, with U.S. and UK support. PEP teams work at the local level to provide year-round, targeted public information to farmers and local officials about the dangers of poppy cultivation, the availability of assistance for alternative livelihoods, and the credible threat that eradication poses to farmers who choose to grow poppy. These teams lay the foundation for the GOA's Afghan Eradication Force (AEF) and Governor-Led Eradication (GLE) to operate in an environment where the public is well informed about its alternatives and aware that illegal crops are subject to destruction.

-- Legislation - In December 2005, President Karzai adopted a counternarcotics law. Afghan prosecutors assisted by the U.S Department of Justice Senior Federal Prosecutors Program drafted the law. After review of the law, Parliament proposed amendments that were still under review at time of publication. This legislation was the first step in supporting Amendment 7 of the Afghan Constitution prohibiting the cultivation and smuggling of narcotics and provides the legal and investigative authority for high-level investigations and prosecutions.

-- Justice Reform - The United States, the United Kingdom, and other donors mentor and assist the Criminal Justice Task Force (CJTF) to investigate and prosecute narcotics traffickers using modern investigative techniques provided for in the counternarcotics law (adopted in December 2005). Narcotics cases are tried before the Counter Narcotics Tribunal (CNT), which has exclusive national jurisdiction over mid- and high-level narcotics cases in Afghanistan. In April 2006, the CNT convicted three major narcotics traffickers - Misri Khan, Haji Bahram Khan, and Noor Ullah - and sentenced them to 17 years in prison for possession, sale, and attempted exportation of heroin. The Counternarcotics Justice Center (CNJC), which will be completed in mid 2007, will provide secure facilities for the CJTF and CNT. It will contain offices, secure courtrooms, and a detention facility to house defendants throughout the trial process. The GOA, with assistance from the United Nations Office on Drugs and Crime (UNODC) and the United States, refurbished a section of the Pol-e Charkhi prison to house 100 maximum-security narcotics traffickers following CNT conviction.

Law Enforcement Efforts. Continued insurgency and lack of GOA capacity to establish the rule of law throughout the entire country have hampered drug law enforcement efforts. The Ministry of Interior (MOI) established the Counter Narcotics Police of Afghanistan (CNPA), comprised of investigation, intelligence, and interdiction units, in 2003. At the end of 2006, the CNPA had approximately 1,100 of its 2,900 authorized staff, which includes the AEF. The DEA works closely with the CNPA, offering training, mentoring, and investigative assistance. Developing MOI capacity and capability for the CNPA remains a high priority for the GOA and foreign donors.

The GOA, with the support of DEA, created the National Interdiction Unit (NIU), a specialized unit within the CNPA that focuses on interdiction and investigations targeting command and control structures of mid-value and high-value drug trafficking organizations in Afghanistan. The DEA trained the sixth NIU class of 50 new recruits in 2006, and the unit now has more than 125 officers. The DEA provided support to the NIU throughout the year by continuing its program of Foreign Advisory Support Teams (FAST) for mentoring and assistance. FAST teams are rotational deployments of specially trained DEA Special Agents and Intelligence Research Specialists who are assigned to Afghanistan for 120-day periods to support the Kabul Country office of the DEA and the NIU in furthering DEA intelligence and law enforcement operations. The NIU also works with the Afghan Special Narcotics Force (ASNF), a UK trained and supported paramilitary interdiction unit used to attack large, hard targets. With this cooperation, the NIU is developing the ability to perform specialized narcotics interdiction and investigative functions capable of disrupting and dismantling major trafficking organizations. NIU operations began in October 2004.

In calendar year 2006 (data through September 2006), the CNPA reported the following seizures: 1,927 kg of heroin, 105 kg of morphine base, 40,052 kg of opium, and 17,675 kg of hashish. During the year, the CNPA also raided 248 drug labs. The CNPA seized 30,856 kg of solid precursor chemicals and 12,681 liters of liquid precursors. The CJTF reported 548 arrests for trafficking under the provisions of the CN law where possession of 2 kg of heroin (or morphine base), 10 kg of opium, or 50 kg of hashish mandates automatic jurisdiction for the CNT. The CJTF obtained 328 convictions during the year.

In August 2006, the DEA cooperated with the GOA on the first controlled delivery of heroin from Afghanistan to the United States (a related delivery connected to the same case went to the United Kingdom). The Minister of Counter Narcotics authorized the law enforcement operation, and the GOA is working to develop a more routine mechanism for future controlled deliveries across international borders. The August case led to arrests in the United States connected to a trafficking network. The Afghan conspirators fled to Pakistan in order to avoid arrest, highlighting the tough problems narcotics law enforcement faces in Afghanistan.

Efforts to interdict precursor substances and processing equipment also suffer from limited police and judicial capacity. While there is a legal requirement to track precursor substances, an active registry does not yet exist to record the data. Many developing countries find their systems strained by this difficult task. The new drug law requires the Ministry of Counter Narcotics to develop a modern regulatory system. Progress in this regard depends on passing new laws, establishing a system for distinguishing between licit and potentially illicit uses of dual-use chemicals, and establishing a specialized police force to enforce the new system.

There is direct evidence linking the insurgency in Afghanistan and narcotics. Poppy cultivation contributes to Taliban funding to include the taxing of poppy farmers by the Taliban. In addition, some drug traffickers willingly finance insurgency activities and provide money to buy weapons. Traffickers provide weapons, funding, and personnel to the Taliban in exchange for the protection of drug trade routes, poppy fields, and members of their organizations.

Haji Bashir Noorzai, a major Afghan trafficker, was arrested in April of 2005, upon entry to the United States at JFK airport. Noorzai is incarcerated in New York pending trial. His indictment alleges that he has a symbiotic relationship with the Taliban. The case of Bashir Noorzai illustrates the link that exists between drug trafficking and terrorist organizations. Noorzai was the leader of the largest Central and Southwest Asia-based heroin drug trafficking organization known to DEA. Noorzai provided explosives, weaponry, and personnel to the Taliban in exchange for protection for his organization's opium poppy crops, heroin laboratories, drug transportation routes, and members and associates. Noorzai was also a close associate of former Supreme Taliban leader Mullah Mohammad Omar, who is now a fugitive. Noorzai himself was a former leader of the Taliban Shura, or Ruling Council.

Haji Baz Mohammed, a major Afghan trafficker, was extradited to the United States in October 2005. In July 2006, he pled guilty to conspiracy to import heroin into the United States. He faces a mandatory minimum of ten years in prison and up to a potential life sentence when he is sentenced in early 2007. Similar to Noorzai's indictment, Mohammed's indictment also alleged that he was closely aligned with the Taliban.

Corruption. GOA policy prohibits the illicit production or distribution of narcotic or psychotropic drugs and other controlled substances and the laundering of proceeds from illegal drug transactions. However, some GOA officials have been accused of profiting from the illegal drug trade. The Government of Afghanistan, with support from the United States, is investigating these allegations. Drug-related corruption remains a problem, being particularly pervasive at provincial and district government levels. Corruption behaviors range from facilitating drug activities to benefiting from revenue streams that the drug trade produces. In 2006, the Ministry of Interior dismissed a district governor and district chief of police from office after they failed to assist in pre-planting campaigns against poppy cultivation. The provincial governor alleged that the two were corrupt and involved in narcotics trafficking and cultivation. During the year, the CNPA arrested a former police officer, Nadir Khan, for selling two kg of heroin to a law enforcement informant. Khan previously had directed a special narcotics unit within the Ministry of Interior.

President Karzai appointed a new Attorney General (AG) in September 2006 who has become an anti-corruption activist, dismissing prosecutors across the country for corruption. The AG is also pursuing corruption investigations against politically sensitive targets. The President also appointed a new reformist Chief Justice of the Supreme Court to head an anti-corruption task force, made up of high-level officials, to tackle the problem of corruption in the government. The GOA recognizes that it must take stronger action against corruption in order to facilitate good governance and assist in implementing its National Drug Control Strategy.

Agreements and Treaties. Afghanistan is a party to the 1988 UN Drug Convention, the 1971 UN Convention, and the 1961 UN Single Convention on Psychotropic Substances. The GOA has no formal extradition or legal assistance arrangements with the United States, but recent Afghan counternarcotics legislation allows the extradition of drug offenders under the 1988 UN Drug Convention. The U.S. Department of Justice extradited a major trafficker, Haji Baz Mohammed, from Afghanistan to the United States in October 2005 under the 1988 UN Drug Convention. A similar effort in 2006 to extradite a major trafficker met with a request from President Karzai that the defendants first stand trial in Afghanistan. The CJTF tried and convicted the defendants; the CNT then sentenced them to 17 years prison. The defendants were still incarcerated in Afghanistan as of November 2006. Afghanistan is not a party to any bilateral treaties that provide mutual legal assistance with any nation, including the United States. Afghanistan is a party to the UN Convention Against Transnational Organized Crime. Afghanistan has signed, but has not yet ratified, the UN Convention Against Corruption.

Illicit Cultivation / Production. According to USG estimates, the number of hectares under poppy cultivation in Afghanistan increased 61 percent, from 107,400 hectares (ha) in 2005 to 172,600 ha in 2006, second to 2004 as the highest level on record. Resulting opium production reached a record 5,644 mt, due to a 36 percent increase in yields for 2006 versus 2004. The opium yield per hectare, however, fell between 2005 and 2006, dropping 41.5 k/ha to 32.7 kg/ha. Based on UNODC data, Afghanistan is the largest cultivator of illicit opium poppy in the world, accounting for 82 percent of global cultivation and 92 percent of potential opium production (based on UNODC's estimated production of 6,100 metric tons in 2006). The number of people involved in opium cultivation increased in 2006, from 2.0 million to 2.9 million. According to UNODC estimates, 12.6 percent of Afghans were involved in opium cultivation during the year.

The decision to plant poppy determines access to land and credit, making it the principal source of livelihood in several areas. Strong linkages between poppy and all aspects of Afghanistan's still profoundly underdeveloped economy exist. The GOA has been unable to prevent opium production due to a number of factors: uneven and fluid security throughout the country, weak governance, limited reach of law enforcement, corruption, some lack of government will, and weak judicial institutions. The lack of equally remunerative economic alternatives to opium also appears to deter vigorous enforcement. The GOA will not likely have the capacity to prevent opium production for some years.

Twelve of Afghanistan's 34 provinces were poppy-free in 2006. Helmand province in the south was the most significant opium producer during the year, cultivating 46 percent of Afghanistan's poppy crop--greater than 79,000 ha (USG estimate). The neighboring provinces of Farah, Oruzgan and Kandahar together produced an additional 24 percent of the country's production. Security problems in the south prevented the government from launching effective eradication and prevention programs. A stable, high farm-gate price for raw opium, along with minimal risk of law enforcement, contributed to farmers' motivations to plant poppy last year.

Eradication efforts in 2006--using manual and mechanical methods--improved over the previous year, increasing from 5,100 ha in 2005 to 15,300 ha in 2006, according to UNODC estimates. Governor-Led Eradication (GLE) accounted for greater than 13,000 ha eradicated nationwide, and the centrally deployed Afghan Eradication Force (AEF) accounted for more than 2,200 ha of eradicated crops in Helmand and the northern provinces of Badakhshan and Baghlan. Opium poppy cultivation increased 61 percent overall, from 107,400 - to 172,600 - hectares. Nevertheless, the percent of opium actually eradicated almost doubled to 8.9 percent of planted poppy versus 4.7 percent the year before. UNODC's Afghanistan survey shows that poppy farmers whose fields were eradicated in 2006 are only 44 percent likely to plant again. Over 80 percent of poppy farmers who did not experience eradication are likely to plant poppy again. Provincial PEP teams reported similar results in their informal surveys.

Rebuilding the rural economy to provide viable alternatives to poppy growing is critical to reducing opium cultivation. USAID continued with its comprehensive Alternative Livelihoods Program (AL) that allocated and obligated $198.4 million to AL projects in the major opium cultivation areas of Afghanistan. These projects are focused on providing increased opportunities in the legal economy for those who no longer grow poppy. AL aims to revitalize the licit rural economy in Afghanistan and create long-term sustainable employment. AL achieves this through projects such as farm to market road construction, irrigation system repair, development of high value crop production, crop diversification, associated agribusiness development, and capacity building activities in rural areas. The full effects of these initiatives are realized over years and are not likely to result in a massive shift away from poppy cultivation in the near future.

Drug Flow/Transit. Drug traffickers and financiers lend money to Afghan farmers in order to facilitate drug cultivation in the country. These traffickers buy the farmers' crops at previously set prices or accept repayment of loans with deliveries of raw opium. In many provinces opium markets exist under the control of regional warlords who also control the illicit arms trade and trafficking in persons. Traders sell to the highest bidder in these markets with little fear of legal consequences, and the gangsters tax the trade.

Drug labs operating within Afghanistan process an increasingly large portion of the country's raw opium into heroin and morphine base, reducing its bulk to 1/10th that of opium. This facilitates its movement to markets in Asia, Europe, and the Middle East with transit routes through Iran, Pakistan, and Central Asia. Organized criminal groups are involved in transporting the opium products onwards to Turkey, Russia, and the rest of Europe. Distribution networks often operate within regional and ethnic kinship groups. Pakistani nationals play a prominent role in all aspects of the drug trade in the South, Southeast, and Northeast border regions.

Domestic Programs/Demand Reduction. The GOA recognizes a growing domestic drug use problem, particularly with opium and increasingly with heroin. The GOA, in cooperation with UNODC, conducted its first nationwide survey on drug use in 2005. According to this survey, Afghanistan had 920,000 drug users, including an estimated 150,000 users of opium and 50,000 heroin addicts, including 7,000 intravenous users (updated statistics not yet available for 2006).

The Afghan National Drug Control Strategy includes rehabilitation and demand reduction programs for existing and potential drug abusers. However, Afghanistan has a shortage of general medical services, and the GOA directs limited resources to these programs. The United Kingdom and Germany--and to a lesser degree, the United States--have funded specific demand reduction and rehabilitation programs.

IV. U.S. Policy Initiatives and Programs

Bilateral Cooperation. Solving the narcotics problem is critical to reconstruction, effective governance, and rule of law in Afghanistan and remains one of the United States' top priorities for Afghanistan. The United States, in coordination with the GOA and the United Kingdom, has crafted a comprehensive, integrated strategy and is providing substantial resources to the following objectives:

  • Win popular support for the government's CN program through a broad public affairs campaign. The U.S. Embassy supports radio, print and person-to-person outreach campaigns that highlight the perils of Afghanistan's continued dependence on opium trade and provide information about alternative livelihood programs that are available. Special emphasis has been placed on person-to-person community outreach activities through the Multiplying Messengers (MM) and PEP programs, which engage local community, religious, and tribal leaders on CN issues. 

  • Develop alternative sources of income to poppy in rural areas. USAID offers a range of development programs and quick-impact, immediate relief-work programs. Starting in late 2006, USAID implemented a widespread rural finance program that will provide credit to farmers and small- and medium-sized enterprises in areas where financial services were previously unavailable. The poppy-basket of Helmand is one of the highest recipients of USAID assistance reaching $114 million of programmed Alternative Livelihood assistance through June 2007. Most of this alternative livelihood assistance is concentrated in central Helmand, which is the focus of our eradication programs in 2007, in addition to the Kajakai dam that provides power to the whole area.

  • Enhance the GOA's capacity to arrest, prosecute, and incarcerate drug offenders. DEA and DOJ prosecutors work closely with their Afghan counterparts in providing developmental training and pursuing specific cases.

  • Destroy drug labs and stockpiles. The NIU and ASNF, in cooperation with the DEA, target drug labs and seize drug stockpiles.

  • Dismantle the drug trafficking/refining networks. DEA works closely with the CNPA, NIU, and ASNF in pursuing criminal investigations and disrupting the narcotics trade.

  • Enhance counternarcotics efforts through a strong eradication campaign. Eradication in 2006 employed manual and mechanical techniques. The United States, through the Department of State's Bureau for International Narcotics and Law Enforcement Affairs (INL), provides training and financial and material support to the Afghan Eradication Force. The United States provides financial support to provincial governors for Governor-Led Eradication.

The Road Ahead. Afghanistan's unstable security, political, and economic environment limit the government's ability to combat narcotics production and trade. The 61 percent increase in the poppy crop in 2006 is discouraging. The GOA understands that its CN implementation plan was not effective during the previous pre-planting season, and it took more focused action during the 2006 pre-planting season in an effort to deter farmers from planting poppy, but the task is challenging for many different reasons set out above. The GOA should also build on its use of eradication as a deterrent by incorporating herbicide, through ground-based spray, to augment and expand its eradication efforts. However, sustained progress against the drug trade will require continued commitment to the GOA's comprehensive counternarcotics implementation plan over several years, and the GOA will require international assistance in combating narcotics over this time period. Drug production and trafficking will continue in Afghanistan until the GOA is able to guarantee a stable security environment and exert its influence through credible law enforcement institutions throughout the country. These developments will provide a foundation for the rural sector to rebound and pursue legal livelihoods. Long-term, sustained assistance and political support from the international community will be necessary to ensure that the GOA can achieve its goals.

Drugs Seized (kg) (Through September 2006)
  2003 2004 2005 2006
  ---- ---- ---- ----
Opium 2,171 17,689 50,048 40,052
Heroin 977 14,006 5,592 1,927
Morphine Base 111 210 118 105
Hashish 10,269 74,002 40,052 17,675
Precursor Chemicals Seized (Through September 2006)
  2003 2004 2005 2006
  ---- ---- ---- ----
Solid (kg) 14,003 3,787 24,719 30,856
Liquid (liters) 0 4,725 40,067 12,681
Arrests (for trafficking) (Through September 2006)
  2003 2004 2005 2006
  ---- ---- ---- ----
Arrests 203 248 275 548
Drug Labs Destroyed (Through September 2006)
  2003 2004 2005 2006
  ---- ---- ---- ----
Labs Destroyed 31 78 26 248



Part II: Money Laundering and Financial Crimes

Afghanistan

Afghanistan

Afghanistan is not a regional financial or banking center. However, its formal financial system is growing rapidly while its traditional informal financial system remains significant in reach and scale. Afghanistan is a major drug trafficking and drug producing country and the illicit narcotics trade is the primary source of laundered funds. Afghanistan passed anti-money laundering and terrorist financing legislation in late 2004, and efforts are being made to strengthen police and customs forces. However, there remain few resources and little expertise to combat financial crimes. The most fundamental obstacles continue to be legal, cultural and historical factors that conflict with more Western-style proposed reforms to the financial sector.

According to United Nations statistics, in 2005 and 2006, opium production increased and today Afghanistan accounts for over 90 percent of the world's opium production. Opium gum itself is sometimes used as a currency, especially by rural farmers, and it is used as a store of value in prime production areas. It is estimated that at least one third of Afghanistan's (licit plus illicit) GDP is derived directly from narcotics activities, and proceeds generated from the drug trade have reportedly fueled a growing real estate boom in Kabul, as well as a sharp increase in capital investment in rural poppy growing areas.

Much of the recent rise in opium production comes from Taliban strongholds in the southern part of the country. There are reports that the Taliban impose taxes on narcotics dealers, which undoubtedly helps finance their terrorist activities. Additional revenue streams for the Taliban and regional warlords come from "protecting" opium shipments, running heroin labs, and from "toll booths" established on transport and smuggling routes.

Afghan opium is refined into heroin by production labs, more of which are being established within Afghanistan's borders. The heroin is then often broken into small shipments and smuggled across porous borders for resale abroad. Payment for the narcotics outside the country is facilitated through a variety of means, including through conventional trade and the traditional hawala system that uses trade as the primary medium to balance accounts. In addition, the narcotics themselves are often used as tradable goods and as a means of exchange for automobiles, construction materials, foodstuffs, vegetable oils, electronics, and other goods between Afghanistan and neighboring Pakistan. Many of these goods are smuggled into Afghanistan from neighboring countries, particularly Iran and Pakistan, or enter via the Afghan Transit Trade without payment of customs duties or tariffs. Most of the trade goods imported into Afghanistan originate in Dubai. Invoice fraud, corruption, indigenous smuggling networks, underground finance, and legitimate commerce are all intertwined.

Afghanistan is widely served by the hawala system, which provides a range of financial and nonfinancial business services in local, regional, and international markets. Financial activities include foreign exchange transactions, funds transfers (particularly to and from neighboring countries with weak regulatory regimes for informal remittance systems), micro and trade finance, as well as some deposit-taking activities. While the hawala network may not provide financial intermediation of the same type as the formal banking system (i.e., deposit-taking for lending and investing purposes based on the assessment, underwriting, and pricing of risks), it is a traditional form of finance and deeply entrenched and widely used throughout Afghanistan and the neighboring region.

There are over 200 known hawala dealers in Kabul, with 100-300 additional dealers in each province. These dealers are loosely organized into informal provincial unions or guilds whose members maintain a number of agent-principal and partnership relationships with other dealers throughout the country and internationally. Their record keeping and accounting practices are robust, efficient, and take note of currencies traded, international pricing, deposit balances, debits and credits with other dealers, lending, cash on hand, etc. Hawaladars are supposed to be licensed; however the licensing regime that existed from April 2004 until September of 2006 was overly burdensome and resulted in issuance of few licenses. In September of 2006, Da Afghanistan Bank (DAB)-Afghanistan's Central Bank-issued a new money service provider regulation that streamlined the licensing process and substantially reduced the licensing and ongoing compliance burden for hawaladars. The regulatory focus of the new regulation is on AML and CTF. The regulation requires and provides standard mechanisms for record keeping and reporting of large transactions. DAB has provided training sessions on the new regulation and has developed a streamlined application process. Several licenses have already been issued under the new regulation, with the majority of Kabul area hawaladars expected to obtain licenses in the near-term as a result of DAB outreach, law enforcement actions, pressure from commercial banks where they hold accounts, and customer demand for licensed providers. Options for strengthening the hawaladar unions and promoting self regulation are also being studied.

In early 2004, DAB worked in collaboration with international donors to establish the legislative framework for anti-money laundering and the suppression of the financing of terrorism. Although Afghanistan was unable to meet its initial commitment to enact both pieces of legislation by September 30, 2004, they were both finalized and signed into law by late October 2004.

The Anti-Money Laundering (AML) and Proceeds of Crime and Combating the Financing of Terrorism (CTF) laws incorporate provisions that are designed to meet the recommendations of the Financial Action Task Force (FATF) and address the criminalization of money laundering and the financing of terrorism, customer due diligence, the establishment of a Financial Intelligence Unit (FIU), international cooperation, extradition, and the freezing and confiscation of funds. The AML law also includes provisions to address cross-border currency reporting, and establishes authorities to seize and confiscate monies found to be undeclared or falsely declared, or determined to be transferred for illicit purposes. However, the capability to enforce these provisions is nearly non-existent, and furthermore, these provisions are largely unknown in many parts of the country.

Under the new AML law, an FIU has been established and is functioning as a semi-autonomous unit within DAB. Banks and other financial and nonfinancial institutions are required to report suspicious transactions and all cash transactions as prescribed by DAB to the FIU, which has the legal authority to freeze assets for up to 7 days. Currently, in excess of four thousand electronically formatted cash transaction reports are being received and processed each month. The FIU, originally set to be established in January 2005, was actually initiated in October 2005 with assignment of a General Director, office space, and other resources. At present the formal banking sector consists of three recently re-licensed state-owned banks, five branches of foreign banks, and six additional domestic banks. AML examinations have been conducted in half of these banks. The result is a growing awareness of AML requirements and deficiencies among the banks and a building of AML capacity. Additionally, the Central Bank has worked with the banking community to develop several ongoing topical working groups focused on AML issues (e.g. "know your customer" provisions and reporting of suspicious transactions).

The Supervision Department within the DAB was formed at the end of 2003, and is divided into four divisions: Licensing, General Supervision (which includes on-site and off-site supervision), Special Supervision (which deals with special cases of problem banks), and Regulation. The Department is charged with administering the AML and CTF legislation, conducting examinations, licensing new institutions, overseeing money service providers, and liaising with the commercial banking sector generally. The effectiveness of the Supervision Department in the AML area remains limited due to staffing, organization, and management issues.

The Ministry of Interior and the Attorney General's Office are the primary financial enforcement authorities. However, neither is able to conduct financial investigations, and both lack the training necessary to follow potential leads generated by an FIU, whether within Afghanistan or from international sources. Pursuant to the Central Bank law, a Financial Services Tribunal will be established to review certain decisions and orders of DAB. There is a need for significant training for judges and administrative staff before the Tribunal will be effective. The Tribunal will review supervisory actions of DAB, but will not prosecute cases of financial crime. At present, all financial crime cases are being forwarded to the Kabul Provincial Court, where there has been little or no activity in the last three years. The process to prosecute and adjudicate cases is long and cumbersome, and significantly underdeveloped.

Border security continues to be a major issue throughout Afghanistan. At present there are 21 border crossings that have come under central government control, utilizing international donor assistance as well as local and international forces. However, many of the border areas continue to be un-policed and therefore susceptible to illicit cross-border trafficking and trade-based money laundering. Many regional warlords also continue to control the international borders in their provincial areas, causing major security risks. Customs authorities, with the help of outside assistance, have made significant strides, but much work remains to be done. Customs collection has improved, but smuggling and corruption continue to be major concerns, as well as trade fraud, which includes false and over-and-under invoicing. Thorough cargo inspections are not conducted at any gateway. A pilot program for declaring large, cross-border currency transactions has been developed for the Kabul International Airport, but has not yet been implemented. If successful, this prototype will serve as the foundation for expansion to other crossings.

Under the Law on Combating the Financing of Terrorism, any nonprofit organization that wishes to collect, receive, grant, or transfer funds and property must be entered in the registry with the Ministry of Auqaf (Islamic Affairs). All nonprofit organizations are subject to a due diligence process which includes an assessment of accounting, record keeping, and other activities. However, the capacity of the Ministry to conduct such examinations is nearly non-existent, and the reality is that any organization applying for a registration is granted one. Furthermore, because no adequate enforcement authority exists, many organizations operating under a "tax-exempt" nonprofit status in Afghanistan go completely unregistered, and illicit activities are suspected on the part of a number of organizations.

The Government of Afghanistan (GOA) has now become a party to 12 of the UN conventions and protocols against terrorism and is a signatory to the International Convention for the Suppression of Acts of Nuclear Terrorism. Afghanistan is a party to the 1988 UN Drug Convention, the UN International Convention for the Suppression of the Financing of Terrorism, and the UN Convention against Transnational Organized Crime. In July 2006, Afghanistan became a member in the Asia Pacific Group, a Financial Action Task Force Style Regional Body (FSRB), and has obtained observer status in the Eurasian Group, another FSRB. Additionally the FIU has initiated the process for joining the Egmont Group of Financial Intelligence Units.

The Government of Afghanistan has made progress over the past year in developing its overall AML/CTF regime. Improvement has been seen in development of the FIU, the reporting of financial intelligence, participation in international AML bodies, improvement in bank AML compliance awareness, systems, and reporting, and in efforts to bring money service providers into a legal and regulatory framework that will result in meaningful AML compliance. However, much work remains to be done. Afghanistan should develop secure, reliable, and capable relationships among departments and agencies involved in law enforcement. Afghanistan should develop the investigative capabilities of law enforcement authorities in the areas of financial crimes, particularly money laundering and terrorist finance. Judicial authorities should also be trained in money laundering prosecutions. Afghan customs authorities should implement cross-border currency reporting and be trained to recognize forms of trade-based money laundering. Border enforcement should be a priority, both to enhance scarce revenue and to disrupt narcotics trafficking and illicit value transfer. Afghan authorities should work to address widespread corruption in commerce and government. Afghanistan should ratify the UN Convention against Corruption.