Compliance Best Practices Tampa, Jun 2014 Gustavo Vidal Financial Institutions LATAM, Miami ‐ USA These materials are provided for educational and illustrative purposes only and not as a solicitation by Citi for any particular product or service. Furthermore, although the information contained herein is believed to be reliable, the following does not constitute legal advice and Citi makes no representation or warranty as to the accuracy or completeness of any information contained herein or otherwise provided by it.
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Compliance Best Practices
Tampa, Jun 2014
Gustavo VidalFinancial Institutions LATAM, Miami ‐ USA
These materials are provided for educational and illustrative purposes only and not as a solicitation by Citi for any particular product or service. Furthermore, although the information contained herein is believed to be reliable, the following does not constitute legal advice and Citi makes no representation or warranty as to the accuracy or completeness of any information contained herein or otherwise provided by it.
Number of BSA/AML Enforcement Actions Continues to GrowAugust 2012 Turkish Bank Ltd. UK FSA. Fined 294,00 pounds for inadequate policies to manage its relationships with other banks, weak due
diligence on those banks and failure to keep proper records.
July 2012 HSBC testifies at the Senate Permanent Subcommittee on Investigation hearing on its AML shortcomings.
February 2011 Zions First National Bank. Concurrent OCC and FinCEN orders. Assessment $8mm. Focused on former foreign correspondent bank business.
October 2010 HSBC. FRB and OCC Cease and Desist order. Focused on firm-wide compliance risk management program, violation of Bank Secrecy Act and its underlying regulations.
May 2010 ABN AMRO (now the Royal Bank of Scotland). US Department of Justice. Forfeiture of $500M. Violation of the Bank Secrecy Act and violation of two laws underlying OFAC.
March 2010 Wachovia. $110M Forfeiture with DOJ, a civil money penalty of $50M and a Cease and Desist with OCC; civil money penalty of $110 with FinCEN. Alleged failures in the AML/BSA program.
January 2008 Sigue Corporation and Sigue, LLC. $12M Civil Money Penalty by FinCEN. Failure to implement effective controls to ensure compliance with BSA.
ING to pay $619 million over Cuba, Iran sanctionsNEW YORK | Tue Jun 12, 2012 4:10pm EDT
HSBC to be fined $1 Billion for Lax Money Laundering ComplianceOn May 24, 2011 ∙ In HSBC, Money Laundering
August 2, 2012
The UK’s FSA fines Turkish Bank Ltd 294,000 pounds for weaknesses in its AML Program around correspondent accounts.
Key AML Program Components
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Know
You
r Customer
Regulatory Oversight
Tran
saction Mon
itorin
gPe
riodic Tran
saction
Review
s
Sanctio
ns Screening
Periodic TrainingCompliance Program Governance & Metrics
Independent Audit, Internal Controls and TestingPolicies and Procedures
U.S. Due Diligence Reqs For FCB Accounts
30
General Due Diligence Requirements Enhanced Due Diligence Requirements Have a program to determine if the account is subject to
enhanced due diligence Assess the money laundering risk posed, based on relevant risk factors:
• The nature of the foreign financial institution’s business and the markets it serves.
• The type, purpose, and anticipated activity of the foreign correspondent account.
• The nature and duration of the bank’s relationship with the foreign financial institution (and, if relevant, with any affiliate of the foreign financial institution).
• The AML and supervisory regime of the jurisdiction that issued the charter or license to the foreign financial institution and, to the extent that information regarding such jurisdiction is reasonably available, of the jurisdiction in which any company that is an owner of the foreign financial institution is incorporated or chartered.
• Information known or reasonably available to the bank about the foreign financial institution’s AML record, including public information in standard industry guides, periodicals, and major publications.
Required when:
• Is the foreign correspondent bank operating under an offshore license?
• Does the FCB operate in a non‐cooperative or known money laundering jurisdiction?
• If the bank finds it appropriate to conduct additional due diligence measures based upon the results of its general due diligence program
Apply risk based policies, procedures, and controls• Detect and report suspected money laundering activity• Periodic review of activity
Conduct appropriate enhanced scrutiny
If the FCB offers correspondent banking services, conduct due diligence on those entities
Identify owners if not publicly traded
A bank’s KYC process should address these requirements.
Other global regulators have imposed similar standards for correspondent accounts
Citi’s KYC Components
31
AML RISK SUMMARY
APPENDIX
PTRTRP
CUSTOMER IDENTIFICATION PROGRAM (CIP)
SPF/PEP
PATRIOT ACT CERTIFICATE
(PAC)
AML COUNTRY REGIME
AML CALL REPORT
WOLFSBERG QUESTIONNAIRE
CLIENT OWNERSHIP
BUSINESS OPERATIONS
NEGATIVE NEWS
BOARD OF DIRECTORS AND SENIOR
MANAGEMENT
MARKET REPUTATION
AML CALL
APF
Citi’s KYC Components
AML RISK SUMMARY
TRANSACTION ACTIVITY REVIEW
CUSTOMER IDENTIFICATION PROGRAM (CIP)
AML COUNTRY REGIME
AML CALL REPORT
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CIP – Customer Identification Program
Sample Question
List any individuals who own 25% or more of the stake of your company.
If the entity is privately held and the owner is another legal entity, identify only the ultimate beneficial owners (i.e. the individuals at the top of the chain of ownership of the entity).
List any individuals who own 25% or more of the stake of your company.
If the entity is privately held and the owner is another legal entity, identify only the ultimate beneficial owners (i.e. the individuals at the top of the chain of ownership of the entity).
Common Answer
Banco XYZ SA is a privately held company. However, there are no individuals that, directly or indirectly,
hold 25% or more of Banco XYZ SA.
Banco XYZ SA is a privately held company. However, there are no individuals that, directly or indirectly,
hold 25% or more of Banco XYZ SA.
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CIP – Customer Identification Program
Desired Answer
As per the ownership structure attached, Nicaragua nationals, Pepe, Lucas, Ramon, and Luisa individually hold 25% of Inverfin CR SA. At the same time Inverfin CR SA owns 80% of Banco XYZ.
As a result, all 4, Pepe, Lucas, Ramon, and Luisa, each indirectly hold 20% of the stake in Banco XYZ SA. The remaining 20% is directly owned by a fifth investor: Hernan.
As per the ownership structure attached, Nicaragua nationals, Pepe, Lucas, Ramon, and Luisa individually hold 25% of Inverfin CR SA. At the same time Inverfin CR SA owns 80% of Banco XYZ.
As a result, all 4, Pepe, Lucas, Ramon, and Luisa, each indirectly hold 20% of the stake in Banco XYZ SA. The remaining 20% is directly owned by a fifth investor: Hernan.
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Citi’s KYC Components
AML RISK SUMMARY
TRANSACTION ACTIVITY REVIEW
CUSTOMER IDENTIFICATION PROGRAM (CIP)
AML COUNTRY REGIME
AML CALL REPORT
35
Transaction Activity – Q&A #1
36
Sample Question
Please provide monthly anticipated volumes and values on the Citi NY correspondent account. Please provide monthly anticipated volumes and values on the Citi NY correspondent account.
Common Answer
Anticipated activity differs from PTR numbers.
Activity on the Citi NY correspondent account is expected to pick up by 20% during 2013.
Anticipated activity differs from PTR numbers.
Activity on the Citi NY correspondent account is expected to pick up by 20% during 2013.
Transaction Activity – Q&A #1
37
Desired Answer
BANK XYZ has calculated an increase of 20% in the transaction activity for 2013.
This a result of an aggressive marketing campaign to create local brand awareness mainly through the
sponsorship of the XI Central American games in Panama City, Panama.
Our client has also become the official bank of the games' organization committee.
Transaction peaks will occur during the months that lead to the event as many international contracts
with builders, sports equipment providers, broadcasters, etc. need to be executed.
BANK XYZ has calculated an increase of 20% in the transaction activity for 2013.
This a result of an aggressive marketing campaign to create local brand awareness mainly through the
sponsorship of the XI Central American games in Panama City, Panama.
Our client has also become the official bank of the games' organization committee.
Transaction peaks will occur during the months that lead to the event as many international contracts
with builders, sports equipment providers, broadcasters, etc. need to be executed.
Transaction Activity – Q&A #2
Sample Question
Please provide detailed information pertaining to top beneficiaries and originators of transactions (>5% volume or value):
The nature of business of the entity and relationship between the counterparties.
The expected purpose of the transactions.
The reason the payments were made in this manner (i.e. round dollar, consecutive days, etc.)
Is the activity expected to reoccur?
Any AML concerns with the activity
Please provide detailed information pertaining to top beneficiaries and originators of transactions (>5% volume or value):
The nature of business of the entity and relationship between the counterparties.
The expected purpose of the transactions.
The reason the payments were made in this manner (i.e. round dollar, consecutive days, etc.)
Is the activity expected to reoccur?
Any AML concerns with the activity
Common Answer
Banco XYZ initiated commercial transactions on behalf of one top originator customer: Softsilk SA,
Softsilk SA is a Salvadorian company dedicated to the production of fabrics.
Softsilk SA is a well regarded name at the local level and also a Citi client.
This transaction activity is expected to continue, no major AML issues have been raised.
Banco XYZ initiated commercial transactions on behalf of one top originator customer: Softsilk SA,
Softsilk SA is a Salvadorian company dedicated to the production of fabrics.
Softsilk SA is a well regarded name at the local level and also a Citi client.
This transaction activity is expected to continue, no major AML issues have been raised. 38
Transaction Activity – Q&A #2
Desired Answer
Softsilk SA was identified as a top originator (more than 5% in volume) of transactions mainly to countries
located in the Middle East.
Softsilk LLC is an important Salvadorian textile producer. The client buys raw materials (threads) for the
production of fabrics to providers located in the Middle East.
Orders are placed monthly. Thus, the activity is recurrent.
Softsilk LLC has all export documentation that supports these transaction activity.
Softsilk LLC has been a client of BANK XYZ for more than 12 years.
Softsilk LLC is also subjected to Banco XYZ KYC process. Banco XYZ does not have any AML concerns with
this transaction activity. Furthermore, this is also an existing Citi client with an up to date file.
Softsilk SA was identified as a top originator (more than 5% in volume) of transactions mainly to countries
located in the Middle East.
Softsilk LLC is an important Salvadorian textile producer. The client buys raw materials (threads) for the
production of fabrics to providers located in the Middle East.
Orders are placed monthly. Thus, the activity is recurrent.
Softsilk LLC has all export documentation that supports these transaction activity.
Softsilk LLC has been a client of BANK XYZ for more than 12 years.
Softsilk LLC is also subjected to Banco XYZ KYC process. Banco XYZ does not have any AML concerns with
this transaction activity. Furthermore, this is also an existing Citi client with an up to date file.
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Citi’s KYC Components
AML RISK SUMMARY
TRANSACTION ACTIVITY REVIEW
CUSTOMER IDENTIFICATION PROGRAM (CIP)
AML COUNTRY REGIME
AML CALL REPORT
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AML Call Report
41
AML Call Report
AML Transaction Monitoring
Special Risks of Client
Customer Due DiligenceInformation which is Known to or Reasonably Available to Citi about
the Client’s AML Record
AML Examinations and Audits
AML Program
Summarize findings and create Call Report
Highlight any Red Flags
Discuss any Issues with Compliance
Raise issues to the client as may be necessary
Comments and Conclusions
AML Call Report – Q&A #1
Sample Question
Describe the structure and staffing of the bank’s AML Department.
Please confirm the number of staff dedicated to AML related functions.
Describe the structure and staffing of the bank’s AML Department.
Please confirm the number of staff dedicated to AML related functions.
Common Answer
Banco XYZ compliance area is comprised of 9 employees. 5 of them are dedicated to AML related activities.
The Compliance officer has a manager rank and reports directly to the board of directors.
The Compliance officer has more than 10 years of experience.
Banco XYZ compliance area is comprised of 9 employees. 5 of them are dedicated to AML related activities.
The Compliance officer has a manager rank and reports directly to the board of directors.
The Compliance officer has more than 10 years of experience.
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AML Call Report – Q&A #1
Desired Answer
Banco XYZ compliance area is comprised of 9 employees.
The compliance officer has a manager rank and reports directly to the board of directors.
She has more than 10 year of experience in Compliance and Controls areas. She has lead the Compliance unit for the past 4 years.
The AML department is a subdivision of the Compliance Unit and has direct oversight from the Compliance officer.
It is composed of 1 AML manager and 4 AML officers that are exclusively dedicated to the analysis of alerts that emanate from the automated transaction monitoring systems.
The number of analysts is adequate for the number of daily alerts raised by the monitoring system (around 50 daily alerts).
Furthermore, Banco XYZ has an adequate number of AML resources when compared to other local banks of the same size.
Banco XYZ compliance area is comprised of 9 employees.
The compliance officer has a manager rank and reports directly to the board of directors.
She has more than 10 year of experience in Compliance and Controls areas. She has lead the Compliance unit for the past 4 years.
The AML department is a subdivision of the Compliance Unit and has direct oversight from the Compliance officer.
It is composed of 1 AML manager and 4 AML officers that are exclusively dedicated to the analysis of alerts that emanate from the automated transaction monitoring systems.
The number of analysts is adequate for the number of daily alerts raised by the monitoring system (around 50 daily alerts).
Furthermore, Banco XYZ has an adequate number of AML resources when compared to other local banks of the same size.
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AML Call Report – Q&A #2
Sample Question
Has the bank filed large currency transaction reports or suspicious activity reports to its local regulator in
the current year?
Has the bank filed large currency transaction reports or suspicious activity reports to its local regulator in
the current year?
Common Answer
Banco XYZ filed 7 suspicious activity reports during 2012. Banco XYZ filed 7 suspicious activity reports during 2012.
44
AML Call Report – Q&A #2
Desired Answer
Banco XYZ filed 7 suspicious activity reports (SARs) during 2012.
This shows a diminishing trend when compared to 2011 filings (11 SARs) and 2010 filings (15 SARs).
Diminishing trends can be explained by more hostile country environment for money launderers.
For example, the Central Bank has increased its requirements to justify recurrent and high value activity. Tougher laws that punish criminal activity have also been enacted in the country in the past 3 years.
Banco XYZ filed 7 suspicious activity reports (SARs) during 2012.
This shows a diminishing trend when compared to 2011 filings (11 SARs) and 2010 filings (15 SARs).
Diminishing trends can be explained by more hostile country environment for money launderers.
For example, the Central Bank has increased its requirements to justify recurrent and high value activity. Tougher laws that punish criminal activity have also been enacted in the country in the past 3 years.
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Citi’s KYC Components
AML RISK SUMMARY
TRANSACTION ACTIVITY REVIEW
CUSTOMER IDENTIFICATION PROGRAM (CIP)
AML COUNTRY REGIME
AML CALL REPORT
46
AML Country Regime – Country Reports
47
“… Although narcotics are still a major source of illegal proceeds for money laundering, the proceeds of other offenses, such as financial fraud and the smuggling of people and goods, have become increasingly important. …”
United Kingdom
Source: United States Department of State ‐ Bureau for International Narcotics and Law Enforcement Affairs ‐ International Narcotics Control Strategy Report
AML Country Regime – Country Reports
48
“… _______ is a major drug‐producing and drug‐transit country. Proceeds from the illicit drug trade leaving the United States are the principal source of funds laundered through the _______ financial system. Other significant sources of laundered proceeds include corruption, kidnapping, and trafficking in firearms and persons…”
Mexico
Source: United States Department of State ‐ Bureau for International Narcotics and Law Enforcement Affairs ‐ International Narcotics Control Strategy Report
AML Country Regime – Country Reports
49
“… _______ is a major drug transit country and money laundering center. A multi‐billion dollar contraband trade, fed in part by endemic, institutional corruption, occurs in the border region shared with _______ and ________ and facilitates much of the money laundering.…”
Paraguay
Source: United States Department of State ‐ Bureau for International Narcotics and Law Enforcement Affairs ‐ International Narcotics Control Strategy Report
AML Country Regime – Country Reports
50
“… _______ is a major cocaine‐transit country. The country‘s proximity to drug producing countries, weaknesses in its anti‐money laundering regime, limited bilateral cooperation, and substantial corruption in law enforcement and other relevant sectors continue to make _______ vulnerable to money laundering. The main sources of money laundering are proceeds generated by drug trafficking organizations and illegal transactions that exploit _______ currency controls and its various exchange rates…”
Venezuela
Source: United States Department of State ‐ Bureau for International Narcotics and Law Enforcement Affairs ‐ International Narcotics Control Strategy Report
AML Country Regime – Country Reports
51
“… Money laundering in ________ is believed to be primarily related to the laundering of the proceeds of drug trafficking, and the country sits along major drug trafficking routes. The work of launderers is facilitated by weaknesses in the regulatory framework, notably the existence of bearer share corporations, but more importantly by uneven enforcement of anti‐money laundering measures and the weak judicial system, which is susceptible to corruption and favoritism…”
Panama
Source: United States Department of State ‐ Bureau for International Narcotics and Law Enforcement Affairs ‐ International Narcotics Control Strategy Report
AML Country Regime – Country Reports
52
“… remains vulnerable to money laundering and other financial crimes, including various schemes that target U.S.‐based victims. Money laundering activities are primarily related to the foreign proceeds of international trafficking in cocaine. A sizeable internet gaming industry also launders millions of dollars in illicit proceeds through ____ and offshore centers annually. …”
Costa Rica
Source: United States Department of State ‐ Bureau for International Narcotics and Law Enforcement Affairs ‐ International Narcotics Control Strategy Report
AML Country Regime – Country Reports
53Source: United States Department of State ‐ Bureau for International Narcotics and Law Enforcement Affairs ‐ International Narcotics Control Strategy Report
“… is a regional leader in the fight against money laundering and terrorist financing. … has a forceful anti‐money laundering/counter‐terrorist financing (AML/CFT) regime. …”
Colombia
“… however, the laundering of money from Colombia‘s illicit cocaine and heroin trade continues to penetrate its economy and affect its financial institutions. Laundered funds also are derived from commercial smuggling for tax and import duty evasion; kidnapping; arms trafficking; and terrorism connected to violent, illegally‐armed groups and guerrilla organizations, including U.S. Government‐designated terrorist organizations …”
Country reports
54
“… The major sources of money laundering proceeds include drug trafficking, fraud, loan-sharking (illegal money lending), remittance frauds, the black market economy, prostitution, and illicit gambling. …”
Japan
Source: United States Department of State - Bureau for International Narcotics and Law Enforcement Affairs - International Narcotics Control Strategy Report
Country reports
55
“… Historically weak law enforcement and judiciary systems coupled with endemic corruption and increasing organized crime activity contribute to a favorable climate for significant money laundering in …”
Guatemala
Source: United States Department of State - Bureau for International Narcotics and Law Enforcement Affairs - International Narcotics Control Strategy Report
Citi’s KYC Components
AML RISK SUMMARY
TRANSACTION ACTIVITY REVIEW
CUSTOMER IDENTIFICATION PROGRAM (CIP)
AML COUNTRY REGIME
AML CALL REPORT
56
PTR & TRP
57
Features Periodic Transaction Review (PTR) Targeted Review Process (TRP)
Description
Review conducted on wire transactions flowing through US accounts of FCBs. Report summarizes activity and provides recommendations where differences are identified related to the client's KYC profile.
To supplement automated monitoring systems by assessing AML risk within FCBs US dollar accounts. It prioritizes the highest risk issues for in-depth review, analysis and potential action.
Purpose
Validate the accuracy of anticipated account activity, identify actual activity inconsistency with the client profile, identify high risk activity patterns and final validation of risk rating based on the activity analysis.
In-depth analysis conducted to review clients that meet certain qualitative and quantitative risk factors. This involves significant interaction between KYC Owners and Compliance
Frequency Conducted in the calendar month preceding the 90-day KYC renewal cycle
Performed on client that meet program criteria. This criteria includes but is not limited to the following:
SAR Reports Negative AML news New relationship and approved by CBOC
Time Covered in Review
Trailing 3 months of activity prior to the month of the PTR review
At least 3 months of wire activity but could be longer based on profile
Other Comments
All FCBs with a US account will be subject to a PTR
TRP are not conducted on all clients meeting Program criteria. Selection is based on a specific set of reviews and prioritization of higher risk items
Citi’s Expectations of its Clients
58
We look forward to a partnership with you during the KYC process.
We expect that when we have questions about your program and activity that
you will be responsive and forthcoming.
We expect that all of our clients have a robust AML Program that meets
regulatory and industry standards.
If we identify that a client’s AML program does not meet the mark it may
require remediation or account closings.
There is much more to do…
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2011: United Nations Office on Drugs and Crime (UNODC)
2011: Less than 1 percent of global illicit financial flows is currently being seized and frozen
2012: 3.6% of $83.1 Tn = $3.0 Tn, 1% = 30 Bn
<1%
Source: UNODC – Estimating Illicit Flows Research Report ‐ 2011
Question & Answer Session
60
QUESTIONS?
Appendix
61
Preguntas Video
62 Source:
1. Para qué están hechas las reglas?
2. No sólo importa el tamaño del negocio, también importa ____
3. Qué información omitió Calvin escalar a su jefe
4. Qué elemento de trabajo de Calvin no se cumplió de acuerdo con el investigador?
Major Money Laundering Countries
63 Source: United States Department of State - Bureau for International Narcotics and Law Enforcement Affairs - International Narcotics Control Strategy Report
Countries/Jurisdictions of Primary Concern (66)Afghanistan France Liechtenstein United Arab EmiratesAntigua and Barbuda Germany Luxembourg United KingdomArgentina Greece Macau United StatesAustralia Guatemala Mexico UruguayAustria Guernsey Netherlands VenezuelaBahamas Guinea Nigeria ZimbabweBelize Haiti PakistanBolivia Hong Kong PanamaBrazil India ParaguayBritish Virgin Islands Indonesia PhilippinesBurma Iran RussiaCambodia Iraq SingaporeCanada Isle Of Man SomaliaCayman Islands Israel SpainChina, People Rep Italy St. MaartenColombia Japan SwitzerlandCosta Rica Jersey TaiwanCuracao Kenya ThailandCyprus Latvia TurkeyDominican Republic Lebanon Ukraine
Major Money Laundering Countries
64 Source: United States Department of State - Bureau for International Narcotics and Law Enforcement Affairs - International Narcotics Control Strategy Report
Countries/Jurisdictions of Concern (68)Albania El Salvador Monaco SurinameAlgeria Ghana Mongolia SyriaAngola Gibraltar Montenegro TanzaniaAruba Grenada Morocco Trinidad and TobagoAzerbaijan Guyana Nicaragua Turks and CaicosBahrain Holy See Peru VanuatuBangladesh Honduras Poland VietnamBarbados Hungary Portugal YemenBelarus Ireland QatarBelgium Jamaica RomaniaBosnia and Herzegovina Jordan Saudi ArabiaBulgaria Kazakhstan SenegalChile Korea, North SerbiaComoros Korea, South SeychellesCook Islands Kosovo Sierra LeoneCote d'Ivoire Kuwait SlovakiaCzech Republic Laos South AfricaDjibouti Malaysia St. Kitts and NevisEcuador Marshall Islands St. LuciaEgypt Moldova St. Vincent
Major Money Laundering Countries
65 Source: United States Department of State - Bureau for International Narcotics and Law Enforcement Affairs - International Narcotics Control Strategy Report
Other Countries/Jurisdictions Monitored (76)Andorra Eritrea Malta SloveniaAnguilla Estonia Mauritania Solomon IslandsArmenia Ethiopia Mauritius South SudanBenin Fiji Micronesia FS Sri LankaBermuda Finland Montserrat SudanBotswana Gabon Mozambique SwazilandBrunei Gambia Namibia SwedenBurkina Faso Georgia Nauru TajikistanBurundi Guinea Nepal Timor‐LesteCameroon Iceland New Zealand TogoCape Verde Kyrgyz Republic Niger TongaCentral African Republic Lesotho Niue TunisiaChad Liberia Norway TurkmenistanCongo, Dem Rep Of Libya Oman UgandaCongo, Rep Of Lithuania Palau UzbekistanCroatia Macedonia Papua New Guinea ZambiaCuba Madagascar RwandaDenmark Malawi SamoaDominica Maldives San MarinoEquatorial Guinea Mali Sao Tome & Principe