Afghanistan RISK & COMPLIANCE REPORT DATE: March 2018 KNOWYOURCOUNTRY.COM Executive Summary - Afghanistan Sanctions: UN and EU Financial Sanctions in force FAFT list of AML No longer on list Deficient Countries Non - Compliance with FATF 40 + 9 Recommendations Higher Risk Areas: US Dept of State Money Laundering Assessment Supporter of or Safe Haven for International Terrorism Not on EU White list equivalent jurisdictions Corruption Index (Transparency International & W.G.I.) World Governance Indicators (Average Score) Failed States Index (Political Issues)(Average Score) International Narcotics Control Majors List Weakness in Government Legislation to combat Money Laundering Medium Risk Areas: Major Investment Areas: Agriculture - products: opium, wheat, fruits, nuts; wool, mutton, sheepskins, lambskins Industries: small-scale production of bricks, textiles, soap, furniture, shoes, fertilizer, apparel, food- products, non-alcoholic beverages, mineral water, cement; handwoven carpets; natural gas, coal, copper Exports - commodities: opium, fruits and nuts, handwoven carpets, wool, cotton, hides and pelts, precious and semi-precious gems Exports - partners: Pakistan 33.1%, India 24.9%, Tajikistan 8.7%, US 5.8% (2012) Imports - commodities: machinery and other capital goods, food, textiles, petroleum products 1 Imports - partners: Pakistan 25.8%, US 17.4%, Russia 8.4%, India 5.5%, China 5.4%, Kazakhstan 4.5%, Germany 4.3% (2012) Investment Restrictions: The Government of the Islamic Republic of Afghanistan taken concrete steps toward fostering a business-friendly environment for both domestic and foreign investment. Security threats limit investors’ opportunities to develop businesses in some provinces, and certain sectors (such as mining and hydrocarbons) still lack a regulatory environment that fully supports investment. The 2005 Private Investment Law (PIL), specifically prohibits discrimination against foreign investors. The PIL permits investments in nearly all sectors of the economy (exceptions are nuclear power, gambling establishments and production of narcotics and intoxicants) The Afghan Constitution and the PIL prohibit foreign ownership of land, which compels most foreign firms to work with an Afghan partner. 2 Contents Section 1 - Background ............................................................................................................................. 4 Section 2 - Anti – Money Laundering / Terrorist Financing ............................................................... 5 FATF status ................................................................................................................................................ 5 Compliance with FATF Recommendations ....................................................................................... 5 Key Findings from latest Mutual Evaluation Report (2011): ............................................................ 5 US Department of State Money Laundering assessment (INCSR) ................................................ 6 Current Weaknesses in Government Legislation (2013 INCRS Comparative Tables): .............. 8 EU White list of Equivalent Jurisdictions ............................................................................................... 9 Offshore Financial Centre ..................................................................................................................... 9 Reports .................................................................................................................................................... 10 International Sanctions ........................................................................................................................ 17 Bribery & Corruption ............................................................................................................................. 18 Corruption and Government Transparency - Report by US State Department .................... 18 Section 3 - Economy .............................................................................................................................. 19 Banking ................................................................................................................................................... 20 Section 4 - Investment Climate ........................................................................................................... 21 Section 5 - Government ........................................................................................................................ 37 Section 6 - Tax ......................................................................................................................................... 38 Methodology and Sources..................................................................................................................... 39 3 Section 1 - Background Ahmad Shah DURRANI unified the Pashtun tribes and founded Afghanistan in 1747. The country served as a buffer between the British and Russian Empires until it won independence from notional British control in 1919. A brief experiment in democracy ended in a 1973 coup and a 1978 communist counter-coup. The Soviet Union invaded in 1979 to support the tottering Afghan communist regime, touching off a long and destructive war. The USSR withdrew in 1989 under relentless pressure by internationally supported anti-communist mujahedin rebels. A series of subsequent civil wars saw Kabul finally fall in 1996 to the Taliban, a hardline Pakistani-sponsored movement that emerged in 1994 to end the country's civil war and anarchy. Following the 11 September 2001 terrorist attacks, a US, Allied, and anti-Taliban Northern Alliance military action toppled the Taliban for sheltering Osama BIN LADIN. The UN- sponsored Bonn Conference in 2001 established a process for political reconstruction that included the adoption of a new constitution, a presidential election in 2004, and National Assembly elections in 2005. In December 2004, Hamid KARZAI became the first democratically elected president of Afghanistan and the National Assembly was inaugurated the following December. KARZAI was re-elected in August 2009 for a second term. Despite gains toward building a stable central government, a resurgent Taliban and continuing provincial instability - particularly in the south and the east - remain serious challenges for the Afghan Government. 4 Section 2 - Anti – Money Laundering / Terrorist Financing FATF status Afghanistan is no longer on the FATF List of Countries that have been identified as having strategic AML deficiencies Latest FATF Statement - 23 June 2017 The FATF welcomes Afghanistan’s significant progress in improving its AML/CFT regime and notes that Afghanistan has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in June 2012. Afghanistan is therefore no longer subject to the FATF’s monitoring process under its on-going global AML/CFT compliance process. Afghanistan will work with APG as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report, in particular, fully implementing the cross-border regulations at its official land border crossing points. Compliance with FATF Recommendations The last Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards in Afghanistan was undertaken by the Financial Action Task Force (FATF) in 2011. According to that Evaluation, Afghanistan was deemed Compliant for 1 and Largely Compliant for 1 of the FATF 40 + 9 Recommendations. It was Partially Compliant or Non-Compliant for all 6 of the Core Recommendations. Key Findings from latest Mutual Evaluation Report (2011): Afghanistan is one of the poorest countries in the world and, after decades of ongoing conflicts and strife, it is still at an early stage of developing its legal and institutional framework. The main challenges that the authorities face are the precarious security situation (including regular occurrence of insurgency attacks), vested interests and corruption, capacity constraints, a large illicit narcotics sector, a weak business environment, and low human capital. Measures have nevertheless been taken to fight crime, including financial crime, and to lay the foundations for an AML/CFT regime. In particular, two legislative decrees were issued by the President in 2004 to fight against money laundering and terrorist financing. Although their constitutionality and, ultimately, the validity of the AML/CFT framework, have not been 5 definitively established, both decrees have been implemented, to a certain extent, by the authorities and the private sector. However, current efforts are not commensurate to the high risk of money laundering and terrorist financing in the country. Illicit narcotic trade and corruption alone generate considerable amounts of illegal funds. Afghanistan is the world’s largest opium producer and exporter and ranks amongst the most corrupt countries in the world. Smuggling and fraud are other major sources of illegal funds. In addition, terrorism and its financing remain a major concern both in terms of the security of Afghanistan and of the funding of terrorist individuals or organizations, and terrorist acts in the country and abroad. Despite the authorities’ efforts, investigations into money laundering and terrorist financing have been few and none of them resulted in charges