"Bangladesh should criminalise terrorist finance. Legislation should provide for safe harbour provisions in order to protect reporting individuals, due diligence programmes, and banker negligence accountability that would make individual bankers responsible under certain circumstances if their institutions launder money," the report said in its Bangladesh chapter on Money Laundering and Financial Crimes.

Ann Peterson, assistant secretary for International Narcotics and Law Enforcement Affairs, released the report in Washington Thursday.

It said Bangladesh should create a financial intelligence collection system and establish a viable Financial Intelligence Unit (FIU) to analyse the intelligence. A lack of training, resources and computer technology, including computer links with the outlying districts, continue to hinder progress.

The report suggested that Bangladesh law enforcement and customs should examine forms of trade-based money laundering. Bangladesh should make further efforts to combat pervasive corruption, which is intertwined with money laundering, smuggling, and tax evasion. Bangladesh should ratify the UN Convention against Transnational Organised Crime.

However, it admitted that while there is evidence of funds laundered through the official banking system, there is no indication of large-scale abuse.

It said money transfers outside the formal banking and foreign exchange licensing system are illegal. The principal money laundering vulnerability remains the widespread use of the underground "hawala" or "hundi" system to transfer money and value outside the formal banking network. The vast majority of hundi transactions in Bangladesh are used to repatriate wages from Bangladeshi workers abroad.

The report said hundi, however, would probably never be completely eradicated as it is used to avoid taxes, customs duties and currency controls. The non-convertibility of the local currency taka coupled with intense scrutiny on foreign currency transactions in formal financial institutions also contribute to the popularity of both hundi and black market money exchanges.

The report said hundi primarily uses trade goods to provide counter valuation or a method of balancing the books in transactions. It is part of trade-based money laundering and a compensation mechanism for the significant amount of goods smuggled into Bangladesh.

An estimated $1 billion worth of dutiable goods are smuggled every year from India into Bangladesh. A comparatively small amount of goods are smuggled out of the country into India.

The report said currently Bangladesh is working to formalise operations for an FIU. Under the 2002 Money Laundering Prevention Act (MLPA), the Anti-Money Laundering Unit (AMLU) of the central bank acts as a de facto FIU and has authority to freeze assets without a court order and seize them with a court order.

It said the central bank has approved the purchase of hardware for the nascent FIU, which will be coupled with link analysis software provided by the US Department of Justice.

The report said the Bangladesh Bank has received approximately 236 suspicious transaction reports since the MLPA was enacted in 2002. To date, there have been no successful prosecutions in part due to procedural problems in adjusting to inter-agency cooperation. A major setback occurred in December 2005 when the Anti-Corruption Commission (ACC) advised the bank that it would not investigate these cases and returned them.

It said the Criminal Investigation Department agreed to take the cases. During 2006, the bank and police hammered out a procedure to investigate cases initiated by the bank through suspicious transactions reports. With the approval of the law minister, dedicated government attorneys will handle the prosecutions. Officials expect prosecutions to begin in 2007.

The Anti-Money Laundering and Terrorist Financing Act 2005 (AMLTF), drafted to replace the MLPA from 2002, was shelved due to political issues related to the recently scrapped national elections in January.

The draft AMLTF provided powers required for an FIU to meet most of the international recommendations set forth by the Egmont Group, including sharing information with law enforcement at home and abroad.

The draft legislation also provided for the establishment of a Financial Investigation and Prosecution Office wherein law enforcement investigators and prosecutors would work as a team from the beginning of the case to trial.

It said the 2005 draft legislation addressed asset forfeiture and provided that assets, substitute assets (without proving the relation to the crime) and instrumentalities of the crime can be forfeited. It did not, however, address the nuts and bolts of asset forfeiture, which the central bank asserts can be addressed administratively and via regulatory procedures. Changes following cabinet review weakened the draft by, for example, deleting provisions for the establishment of an enforcement group that would be comprised of central bank analysts, police and prosecutors.

The report noted that the AML draft also criminalised terrorism financing. The government announced that it wanted a separate anti-terrorism law that would criminalise terrorist financing, stipulating that the Anti-Terrorism Act would have to be passed before the AML. The Anti-Terrorism Act was not sent to parliament in 2006. A worrying development in the initial review stage of the Anti-Terrorism Act was the removal of the section providing for international cooperation.

In 2003, it said, Bangladesh froze a nominal sum in an account of a designated entity on the UNSCR 1267 Sanctions Committee's consolidated list and identified an empty account of another entity.

In 2004, following investigation of the accounts of an entity listed on the UNSCR 1267 consolidated list, the central bank fined two local banks for failure to comply with Bangladesh Bank regulatory directives.

In 2005, the government became a party to the UN International Convention for the Suppression of the Financing of Terrorism and is now a party to 12 UN conventions and protocols on terrorism. The government is a party to the 1988 UN Drug Convention but is not a signatory to the convention against transnational organised crime. Bangladesh is a member of the Asia Pacific Group on Money Laundering.