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Home > News & Events > Inactive Financial Institution Letters




Inactive Financial Institution Letters
[Federal Register: April 26, 2005 (Volume 70, Number 79)]
[Proposed Rules]               
[Page 21362-21369]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ap05-18]                         

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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA81

 
Financial Crimes Enforcement Network; Amendment to the Bank 
Secrecy Act Regulations--Imposition of Special Measure Against 
Multibanka

AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: FinCEN is issuing this notice of proposed rulemaking to impose 
a special measure against joint stock company Multibanka (Multibanka) 
as a financial institution of primary money laundering concern, 
pursuant to the authority contained in 31 U.S.C. 5318A.

DATES: Written comments on the notice of proposed rulemaking must be 
submitted on or before May 26, 2005.

ADDRESSES: You may submit comments, identified by RIN 1506-AA81, by any 
of the following methods:
     Federal e-rulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regcomments@fincen.treas.gov. Include RIN 1506-
AA81 in the subject line of the message.
     Mail: FinCEN, P.O. Box 39, Vienna, VA 22183. Include RIN 
1506-AA81 in the body of the text.
    Instructions: It is preferable for comments to be submitted by 
electronic mail because paper mail in the

[[Page 21363]]

Washington, DC, area may be delayed. Please submit comments by one 
method only. All submissions received must include the agency name and 
the Regulatory Information Number (RIN) for this rulemaking. All 
comments received will be posted without change to http://
www.fincen.gov, including any personal information provided. Comments 
may be inspected at FinCEN between 10 a.m. and 4 p.m. in the FinCEN 
reading room in Washington, DC. Persons wishing to inspect the comments 
submitted must request an appointment by telephone at (202) 354-6400 
(not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs 
Division, FinCEN, (800) 949-2732.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory Provisions

    On October 26, 2001, the President signed into law the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act), 
Public Law 107-56. Title III of the USA PATRIOT Act amends the anti-
money laundering provisions of the Bank Secrecy Act (BSA), codified at 
12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314, 5316-
5332, to promote the prevention, detection, and prosecution of 
international money laundering and the financing of terrorism. 
Regulations implementing the BSA appear at 31 CFR part 103. The 
authority of the Secretary of the Treasury (``the Secretary'') to 
administer the BSA and its implementing regulations has been delegated 
to the Director of FinCEN.\1\
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    \1\ Therefore, references to the authority of the Secretary of 
the Treasury under section 311 of the USA PATRIOT Act apply equally 
to the Director of FinCEN.
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    Section 311 of the USA PATRIOT Act (``section 311'') added section 
5318A to the BSA, granting the Secretary the authority, upon finding 
that reasonable grounds exist for concluding that a foreign 
jurisdiction, institution, class of transactions, or type of account is 
of ``primary money laundering concern,'' to require domestic financial 
institutions and financial agencies to take certain ``special 
measures'' against the primary money laundering concern. Section 311 
identifies factors for the Secretary to consider and Federal agencies 
to consult before the Secretary may conclude that a jurisdiction, 
institution, class of transactions, or type of account is of primary 
money laundering concern. The statute also provides similar procedures, 
including factors and consultation requirements, for selecting the 
specific special measures to be imposed against the primary money 
laundering concern.
    Taken as a whole, section 311 provides the Secretary with a range 
of options that can be adapted to target specific money laundering 
concerns most effectively. These options give the Secretary the 
authority to bring additional pressure on those jurisdictions and 
institutions that pose money laundering threats. Through the imposition 
of various special measures, the Secretary can gain more information 
about the concerned jurisdictions, institutions, transactions, and 
accounts; can more effectively monitor the respective jurisdictions, 
institutions, transactions, and accounts; and/or can protect U.S. 
financial institutions from involvement with jurisdictions, 
institutions, transactions, or accounts that pose a money laundering 
concern.
    Before making a finding that reasonable grounds exist for 
concluding that a foreign financial institution is of primary money 
laundering concern, the Secretary is required by the Bank Secrecy Act 
to consult with both the Secretary of State and the Attorney General. 
The Secretary also is required by section 311 to consider ``such 
information as the Secretary determines to be relevant, including the 
following potentially relevant factors:''
     The extent to which such financial institution is used to 
facilitate or promote money laundering in or through the jurisdiction;
     The extent to which such financial institution is used for 
legitimate business purposes in the jurisdiction; and
     The extent to which the finding that the institution is of 
primary money laundering concern is sufficient to ensure, with respect 
to transactions involving the institution operating in the 
jurisdiction, that the purposes of the BSA continue to be fulfilled, 
and to guard against international money laundering and other financial 
crimes.
    If the Secretary determines that a foreign financial institution is 
of primary money laundering concern, the Secretary must determine the 
appropriate special measure(s) to address the specific money laundering 
risks. Section 311 provides a range of special measures that can be 
imposed individually, jointly, in any combination, and in any 
sequence.\2\ The Secretary's imposition of special measures requires 
additional consultations to be made and factors to be considered. The 
statute requires the Secretary to consult with appropriate Federal 
agencies and other interested parties \3\ and to consider the following 
specific factors:
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    \2\ Available special measures include requiring: (1) 
Recordkeeping and reporting of certain financial transactions; (2) 
collection of information relating to beneficial ownership; (3) 
collection of information relating to certain payable-through 
accounts; (4) collection of information relating to certain 
correspondent accounts; and (5) prohibition or conditions on the 
opening or maintaining of correspondent or payable-through accounts. 
31 U.S.C. 5318A (b)(1)-(5). For a complete discussion of the range 
of possible countermeasures, see the notice at 68 FR 18917 (April 
17, 2003), which proposed the imposition of special measures against 
Nauru.
    \3\ Section 5318A(a)(4)(A) requires the Secretary to consult 
with the Chairman of the Board of Governors of the Federal Reserve 
System, any other appropriate Federal banking agency, the Secretary 
of State, the Securities and Exchange Commission, the Commodity 
Futures Trading Commission, the National Credit Union 
Administration, and, in the sole discretion of the Secretary, ``such 
other agencies and interested parties as the Secretary may find to 
be appropriate.'' The consultation process must also include the 
Attorney General if the Secretary is considering prohibiting or 
imposing conditions on domestic financial institutions maintaining 
correspondent account relationships with the designated entity.
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     Whether similar action has been or is being taken by other 
nations or multilateral groups;
     Whether the imposition of any particular special measure 
would create a significant competitive disadvantage, including any 
undue cost or burden associated with compliance, for financial 
institutions organized or licensed in the United States;
     The extent to which the action or the timing of the action 
would have a significant adverse systemic impact on the international 
payment, clearance, and settlement system, or on legitimate business 
activities involving the particular institution; and
     The effect of the action on United States national 
security and foreign policy.\4\
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    \4\ Classified information used in support of a section 311 
finding and measure(s) may be submitted by the Treasury to a 
reviewing court ex parte and in camera. See section 376 of the 
Intelligence Authorization Act for Fiscal Year 2004, Pub. L. 108-177 
(amending 31 U.S.C. 5318A by adding new paragraph (f)).
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B. Multibanka

    In this rulemaking, FinCEN proposes the imposition of the fifth 
special measure (31 U.S.C. 5318A(b)(5)) against Multibanka, a 
commercial bank in Latvia. The fifth special measure prohibits or 
conditions the opening or maintaining of correspondent or payable-
through accounts for the designated institution by U.S. financial 
institutions. This special measure may be imposed only through the 
issuance of a regulation.
    Multibanka is headquartered in Riga, the capital of the Republic of 
Latvia.

[[Page 21364]]

Multibanka is the oldest commercial bank in Latvia and is among the 
smaller of Latvia's 23 banks, reported to have approximately $269 
million in assets and 150 employees. Its predecessor entity, created in 
1988, was the Latvian branch of a Soviet bank that was nationalized in 
1991. The resulting entity became the Foreign Operations Department of 
the Bank of Latvia. Three years later, in April 1994, the Department of 
Foreign Operations was privatized and became Multibanka. In 1995, 
Multibanka merged with joint stock company LNT Skonto Banka, increasing 
its assets and resources. Multibanka has four foreign offices in 
Russia, Ukraine, and Belarus; five domestic branches; and one leasing 
subsidiary, Multilizings.
    Multibanka offers confidential banking services and numbered 
accounts for non-Latvian customers. Reports substantiate that a 
significant portion of its business involves wiring money out of the 
country on behalf of its accountholders.
    The bank has been suspected of being used by Russian and other 
shell companies to facilitate financial crime. A common way for 
criminals to disguise illegal proceeds is to establish shell companies 
in countries known for lax enforcement of anti-money laundering laws. 
The criminals use the shell companies to conceal the true ownership of 
the accounts and assets, which is ideal for the laundering of funds. 
One reported scheme works in the following way: Suspect shell companies 
move money into their accounts at Multibanka. The money is designated 
as payment for goods and services to other shell companies or 
individuals, but is deposited into the originating company's account 
with Multibanka. Multibanka later transfers the funds to destinations 
outside Latvia upon the instructions of the originating shell 
companies. These transactions are suspected of being used to facilitate 
illegal transfers of money out of other countries and tax evasion. Due 
to concerns about transactions flowing through Multibanka involving 
suspected shell corporations, some U.S. financial institutions have 
already terminated correspondent relationships with Multibanka.
    FinCEN also has reason to believe that certain criminals use 
accounts at Multibanka to facilitate financial fraud schemes. 
Specifically, one individual involved in financial fraud reported 
having success in carrying out large-sum transactions through his 
account at Multibanka. FinCEN is also aware that an individual arrested 
in 2004 for his involvement in an access device fraud ring used an 
account at Multibanka to launder proceeds of his criminal activities.

C. Latvia

    Latvia's role as a regional financial center, the number of 
commercial banks with respect to its size, and those banks' sizeable 
non-resident deposit base continue to pose significant money laundering 
risks. Latvian authorities recently have sought tighter legislative 
controls, regulations, and ``best practices'' designed to fight 
financial crime. Despite Latvia's recent efforts and amended laws, 
however, money laundering in Latvia remains a concern. Latvia's 
geographical position, situated by the Baltic Sea and bordering Russia, 
Estonia, Belarus, and Lithuania, make it an attractive transit country 
for both legitimate and illegitimate trade. Sources of laundered money 
in these countries include counterfeiting, corruption, arms 
trafficking, contraband smuggling, and other crimes. It is believed 
that most of Latvia's narcotics trafficking is conducted by organized 
crime groups that began with cigarette and alcohol smuggling and then 
progressed to narcotics.
    Of particular concern is that many of Latvia's institutions do not 
appear to serve the Latvian community, but instead serve suspect 
foreign private shell companies. As previously discussed, criminals 
frequently launder money through the use of shell companies. Similarly, 
a large number of foreign depositors or a large percentage of assets in 
foreign funds may indicate that a bank is being used to launder money 
or evade taxes. Latvia's 23 banks held approximately $5 billion in 
nonresident deposits at the end of 2004, mainly from Russia and other 
parts of the former Soviet Union. These deposits accounted for more 
than half of all the money held in Latvian banks.
    Despite growing efforts by the Latvian government for reform, 
material weaknesses in the implementation and enforcement of its anti-
money laundering laws exist. To date there have been no forfeitures of 
illicit proceeds based on money laundering. In addition, suspicious 
activity reporting thresholds remain high, at nearly 40,000 LATS (about 
$80,000 dollars) for most transactions, which fails to capture 
significant activity below this threshold. Furthermore, since 2004, 
only two money laundering cases have been tried in Latvian courts, with 
both cases ending in acquittals.
    Latvia has a general reputation for permissive bank secrecy laws 
and lax enforcement, as evidenced by multiple non-Latvian Web sites 
that offer to establish offshore accounts with Latvian banks in 
general, and Multibanka, in particular. The sites claim that Latvian 
banks offer secure and confidential banking, especially through online 
banking services. FinCEN also has reason to believe that certain 
Latvian financial institutions are used by online criminal groups, 
frequently referred to as ``carding'' groups, to launder the proceeds 
of their illegal activities. Such groups consist of computer hackers 
and other criminals that use the Internet as a means of perpetrating 
credit card fraud, identity theft, and related financial crimes. One of 
the primary concerns of carding group members is their ability to 
convert the funds obtained through fraud into cash. Anonymity is 
another major consideration for online criminals. Reports substantiate 
that in order to support these two needs, a significant number of 
carders have turned to Latvian financial institutions for the safe and 
quasi-anonymous cashing out of their illegal proceeds. FinCEN has 
additional reason to believe that certain Latvian financial 
institutions allow non-citizens to open accounts over the Internet, and 
offer anonymous ATM cards with high or no withdrawal limits.
    Latvia has taken steps to address money laundering risks and 
corruption. In February 2004, a new anti-money laundering law removed 
some barriers that impeded the prosecution of money laundering. The law 
expanded the categories of financial institutions covered by reporting 
requirements to include auditors, lawyers, and high-value dealers, as 
well as credit institutions. The law also recognizes terrorism as a 
predicate offense for money laundering.
    Recognizing the existence of widespread official corruption, the 
Latvian government, in January 2002, established the Anti-Corruption 
Bureau (ACB), an independent agency to combat public corruption by 
investigating and prosecuting Latvian officials involved in unlawful 
activities. In 2004, the ACB reviewed over 700 cases of suspected 
public corruption. Although this initiative is encouraging, FinCEN 
considers the high levels of corruption in Latvia's Government and 
security forces an impediment both to its international information-
sharing efforts and to the fair enforcement of Latvia's anti-money 
laundering laws.
    According to the International Narcotics Strategy Control Report 
(INSCR) published in March 2005 by the U.S. Department of State, 
Latvia's banking system is vulnerable to the laundering of narcotics 
proceeds. The report designates Latvia a jurisdiction of

[[Page 21365]]

``primary concern.'' ``Jurisdictions of Primary Concern'' in INSCR are 
jurisdictions that are identified as ``major money laundering 
countries,'' that is, countries ``whose financial institutions engage 
in currency transactions involving significant amounts of proceeds from 
international narcotics trafficking.''

II. Imposition of Special Measure Against Multibanka as a Financial 
Institution of Primary Money Laundering Concern

A. Finding

    Based on a review and analysis of relevant information, 
consultations with relevant Federal agencies and departments, and after 
consideration of the factors enumerated in section 311, the Secretary, 
through his delegate, the Director of FinCEN, has determined that 
reasonable grounds exist for concluding that Multibanka is a financial 
institution of primary money laundering concern based on a number of 
factors, including:
1. The Extent to Which Multibanka Has Been Used to Facilitate or 
Promote Money Laundering in or Through the Jurisdiction
    FinCEN has determined, based upon a variety of sources, that 
Multibanka is being used to facilitate or promote money laundering and 
other financial crimes. The proceeds of illicit activity have been 
transferred by shell companies with no apparent legitimate business 
purpose to or through correspondent accounts held by Multibanka at U.S. 
financial institutions. As already described above, many shell 
companies are suspected of moving money illegally or laundering illegal 
proceeds through their accounts at Multibanka, followed immediately by 
orders that Multibanka transfer the funds out of the country. These 
shell companies repeatedly used accounts at Multibanka to engage in a 
pattern of behavior indicative of money laundering. For example, in a 
one-month period during 2004, one U.S. bank received over 2,000 payment 
instructions involving $68 million associated with eight suspected 
shell companies with accounts at Multibanka.
    As stated above, FinCEN has determined that certain individuals 
view Multibanka as an excellent bank for conducting financial fraud 
schemes and to launder the proceeds of their criminal activity. In 
fact, one individual involved in such schemes reported that he 
successfully moved large sums through his Multibanka account.
2. The Extent to Which Multibanka Is Used for Legitimate Business 
Purposes in the Jurisdiction
    It is difficult to determine the extent to which Multibanka is used 
for legitimate purposes. As already stated, inordinately high 
percentages of foreign assets or depositors and the use of a bank by 
shell companies are both indicators of possible money laundering 
activities. A significant portion of Multibanka's business is with 
shell companies, many from the former Soviet Bloc countries. FinCEN has 
reason to believe that the bank has a reputation for operating as an 
offshore bank that primarily services foreign shell companies. 
Multibanka is an important banking resource for such offshore 
companies, allegedly allowing them to access the international 
financial system to pursue illicit financial activities. FinCEN 
believes that any legitimate use of Multibanka is significantly 
outweighed by its use to promote or facilitate money laundering and 
other financial crimes. Nevertheless, FinCEN specifically solicits 
comments on the impact of the proposed special measure upon any 
legitimate transactions conducted with Multibanka involving, in 
particular, U.S. persons or entities, foreign persons, entities, and 
governments, and multilateral organizations doing legitimate business 
with persons, entities, or the government of the jurisdiction or 
operating in the jurisdiction.
3. The Extent to Which Such Action Is Sufficient To Ensure, With 
Respect to Transactions Involving Multibanka, That the Purposes of the 
BSA Continue To Be Fulfilled, and To Guard Against International Money 
Laundering and Other Financial Crimes
    As detailed above, FinCEN has reasonable grounds to conclude that 
Multibanka is being used to promote or facilitate international money 
laundering. Currently, there are no protective measures that 
specifically target Multibanka. Thus, finding Multibanka to be a 
financial institution of primary money laundering concern and 
prohibiting the maintenance of correspondent accounts for that 
institution are necessary steps to prevent suspect accountholders at 
Multibanka from accessing the U.S. financial system to facilitate money 
laundering or to engage in any other criminal purpose. The proposed 
special measure would not only prohibit U.S. financial institutions 
from maintaining direct correspondent relationships with Multibanka, 
but also would require them to take reasonable steps to prevent 
indirect use of correspondent services by Multibanka through 
intermediary financial institutions. The finding of primary money 
laundering concern and the imposition of the special measure also will 
bring criminal conduct occurring at or through Multibanka to the 
attention of the international financial community and, it is hoped, 
further limit the bank's ability to be used for money laundering or for 
other criminal purposes.

B. Imposition of Special Measure

    As a result of the finding that Multibanka is a financial 
institution of primary money laundering concern, and based upon the 
additional consultations and the consideration of relevant factors, the 
Secretary, through his delegate, the Director of FinCEN, has determined 
that reasonable grounds exist for the imposition of the special measure 
authorized by 31 U.S.C. 5318A(b)(5).\5\ That special measure authorizes 
the prohibition of opening or maintaining correspondent accounts \6\ by 
any domestic financial institution or agency for or on behalf of a 
targeted financial institution. A discussion of the additional section 
311 factors relevant to imposing this particular special measure 
follows.
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    \5\ In connection with this section, FinCEN consulted with staff 
of the Federal functional regulators, the Department of Justice, and 
the State Department.
    \6\ For purposes of the proposed rule, a correspondent account 
is defined as an account established to receive deposits from, or 
make payments or other disbursements on behalf of, a foreign bank, 
or handle other financial transactions related to the foreign bank.
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1. Whether Similar Actions Have Been or Will Be Taken by Other Nations 
or Multilateral Groups Against Multibanka
    Other countries and multilateral groups have not, as yet, taken 
action similar to that proposed in this rulemaking to prohibit domestic 
financial institutions and agencies from opening or maintaining a 
correspondent account for or on behalf of Multibanka, and to require 
those domestic financial institutions and agencies to screen their 
correspondents for nested correspondent accounts held by Multibanka. 
FinCEN encourages other countries to take similar action based on the 
findings contained in this rulemaking. In the absence of similar action 
by other countries, it is even more imperative that the fifth special 
measure be imposed in order to prevent access by Multibanka to the U.S. 
financial system.

[[Page 21366]]

2. Whether the Imposition of the Fifth Special Measure Would Create a 
Significant Competitive Disadvantage, Including Any Undue Cost or 
Burden Associated With Compliance, for Financial Institutions Organized 
or Licensed in the United States
    The fifth special measure sought to be imposed by this rulemaking 
would prohibit covered financial institutions from opening and 
maintaining correspondent accounts for, or on behalf of, Multibanka. As 
a corollary to this measure, covered financial institutions also would 
be required to take reasonable steps to apply special due diligence, as 
set forth below, to all of their correspondent accounts to help ensure 
that no such account is being used indirectly to provide services to 
Multibanka. FinCEN does not expect the burden associated with these 
requirements to be significant, given its understanding that few U.S. 
banks currently maintain correspondent accounts for Multibanka. There 
is a minimal burden involved in transmitting a one-time notice to all 
correspondent accountholders concerning the prohibition on indirectly 
providing services to Multibanka. In addition, all U.S. financial 
institutions currently apply some degree of due diligence to the 
transactions or accounts subject to sanctions administered by the 
Office of Foreign Assets Control (OFAC) of the Department of the 
Treasury. As explained in more detail in the section-by-section 
analysis below, financial institutions should be able to easily adapt 
their current screening procedures for OFAC sanctions to comply with 
this special measure. Thus, the special due diligence that would be 
required by this rulemaking is not expected to impose a significant 
additional burden upon U.S. financial institutions.
3. The Extent to Which the Proposed Action or Timing of the Action Will 
Have a Significant Adverse Systemic Impact on the International 
Payment, Clearance, and Settlement System, or on Legitimate Business 
Activities of Multibanka
    This proposed rulemaking targets Multibanka specifically; it does 
not target a class of financial transactions (such as wire transfers) 
or a particular jurisdiction. Multibanka is not a major participant in 
the international payment system and is not relied upon by the 
international banking community for clearance or settlement services. 
Thus, the imposition of the fifth special measure against Multibanka 
will not have a significant adverse systemic impact on the 
international payment, clearance, and settlement system. In light of 
the reasons for imposing this special measure, FinCEN does not believe 
that it will impose an undue burden on legitimate business activities, 
and notes that the presence of approximately 15 larger banks in Latvia 
will alleviate the burden on legitimate business activities within that 
jurisdiction.
4. The Effect of the Proposed Action on U.S. National Security and 
Foreign Policy
    The exclusion from the U.S. financial system of banks that serve as 
conduits for significant money laundering activity and other financial 
crimes enhances national security by making it more difficult for money 
launderers and other criminals to access the substantial resources of 
the U.S. financial system. In addition, the imposition of the fifth 
special measure against Multibanka would complement the U.S. 
Government's overall foreign policy strategy of making entry into the 
U.S. financial system more difficult for high-risk financial 
institutions located in jurisdictions that have lax anti-money 
laundering controls. More generally, the imposition of the fifth 
special measure would complement diplomatic actions undertaken by both 
the Latvian and United States Governments to expose and disrupt 
international money laundering and other financial crimes.
    Therefore, after conducting the required consultations and weighing 
the relevant factors, FinCEN has determined that reasonable grounds 
exist for concluding that Multibanka is a financial institution of 
primary money laundering concern and for imposing the special measure 
authorized by 31 U.S.C. 5318A(b)(5).

III. Section-by-Section Analysis

    The proposed rule would prohibit covered financial institutions 
from establishing, maintaining, administering, or managing in the 
United States any correspondent account for, or on behalf of, 
Multibanka. As a corollary to this prohibition, covered financial 
institutions would be required to apply special due diligence to their 
correspondent accounts to guard against their indirect use by 
Multibanka. At a minimum, that special due diligence must include two 
elements. First, a covered financial institution must notify its 
correspondent accountholders that they may not provide Multibanka with 
access to the correspondent account maintained at the covered financial 
institution. Second, a covered financial institution must take 
reasonable steps to identify any indirect use of its correspondent 
accounts by Multibanka, to the extent that such indirect use can be 
determined from transactional records maintained by the covered 
financial institution in the normal course of business. A covered 
financial institution must take a risk-based approach when deciding 
what, if any, other due diligence measures it should adopt to guard 
against the indirect use of its correspondent accounts by Multibanka, 
based on risk factors such as the type of services it offers and 
geographic locations of its correspondents.

A. 103.191(a)--Definitions

1. Correspondent Account
    Section 103.191(a)(1) defines the term ``correspondent account'' by 
reference to the definition contained in 31 CFR 103.175(d)(1)(ii). 
Section 103.175(d)(1)(ii) defines a correspondent account to mean an 
account established to receive deposits from, or make payments or other 
disbursements on behalf of, a foreign bank, or to handle other 
financial transactions related to the foreign bank.
    In the case of a U.S. depository institution, this broad definition 
would include most types of banking relationships between a U.S. 
depository institution and a foreign bank, including payable-through 
accounts.
    In the case of securities broker-dealers, futures commission 
merchants, introducing brokers, and investment companies that are open-
end companies (mutual funds), a correspondent account would include any 
account that permits the foreign bank to engage in (1) trading in 
securities and commodity futures or options, (2) funds transfers, or 
(3) other types of financial transactions.
    FinCEN is using the same definition for purposes of the proposed 
rule as that established in the final rule implementing sections 313 
and 319(b) of the USA PATRIOT Act,\7\ except that the term is being 
expanded to cover such accounts maintained by mutual funds, futures 
commission merchants, and introducing brokers.
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    \7\ See 67 FR 60562 (Sept. 26, 2002), codified at 31 CFR 
103.175(d)(1).
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2. Covered Financial Institution
    Section 103.191(a)(2) of the proposed rule defines covered 
financial institution to mean all of the following: Any insured bank 
(as defined in section 3(h) of the Federal Deposit Insurance Act (12 
U.S.C. 1813(h)); a commercial bank or trust company; a private banker; 
an agency or branch of a foreign bank in the United States; a credit 
union; a thrift institution; a corporation acting

[[Page 21367]]

under section 25A of the Federal Reserve Act (12 U.S.C. 611 et seq.); a 
broker or dealer registered or required to register with the SEC under 
the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.); a futures 
commission merchant or an introducing broker registered, or required to 
register, with the CFTC under the Commodity Exchange Act (7 U.S.C. 1 et 
seq.); and an investment company (as defined in section 3 of the 
Investment Company Act of 1940 (15 U.S.C. 80a-3)) that is an open-end 
company (as defined in section 5 of the Investment Company Act of 1940 
(15 U.S.C. 80a-5)) that is registered, or required to register, with 
the SEC under section 8 of the Investment Company Act of 1940 (15 
U.S.C. 80a-8).
3. Multibanka
    Section 103.191(a)(3) of the proposed rule defines Multibanka to 
include all branches, offices, and subsidiaries of Multibanka operating 
in Latvia or in any other jurisdiction. Multilizings, and any of its 
branches, is included in the definition. FinCEN will provide 
information regarding the existence or establishment of any other 
subsidiaries as it becomes available. Nevertheless, covered financial 
institutions should take commercially reasonable measures to determine 
whether a customer is a subsidiary of Multibanka.

B. 103.192(b)--Requirements for Covered Financial Institutions

    For purposes of complying with the proposed rule's prohibition on 
the opening or maintaining of correspondent accounts for, or on behalf 
of, Multibanka, FinCEN expects that a covered financial institution 
will take such steps that a reasonable and prudent financial 
institution would take to protect itself from loan fraud or other fraud 
or loss based on misidentification of a person's status.
1. Prohibition on Direct Use of Correspondent Accounts
    Section 103.191(b)(1) of the proposed rule prohibits all covered 
financial institutions from establishing, maintaining, administering, 
or managing a correspondent account in the United States for, or on 
behalf of, Multibanka. The prohibition would require all covered 
financial institutions to review their account records to ensure that 
they maintain no accounts directly for, or on behalf of, Multibanka.
2. Special Due Diligence of Correspondent Accounts To Prohibit Indirect 
Use
    As a corollary to the prohibition on maintaining correspondent 
accounts directly for Multibanka, section 103.191(b)(2) requires a 
covered financial institution to apply special due diligence to its 
correspondent accounts that is reasonably designed to guard against 
their indirect use by Multibanka. At a minimum, that special due 
diligence must include notifying correspondent accountholders that they 
may not provide Multibanka with access to the correspondent account 
maintained at the covered financial institution. For example, a covered 
financial institution may satisfy this requirement by transmitting the 
following notice to all of its correspondent accountholders:

    Notice: Pursuant to U.S. regulations issued under section 311 of 
the USA PATRIOT Act, 31 CFR 103.191, we are prohibited from 
establishing, maintaining, administering or managing a correspondent 
account for, or on behalf of, joint stock company Multibanka 
(Multibanka) or any of its subsidiaries, including Multilizings. The 
regulations also require us to notify you that you may not provide 
Multibanka or any of its subsidiaries with access to the 
correspondent account you hold at our financial institution. If we 
become aware that Multibanka or any of its subsidiaries is 
indirectly using the correspondent account you hold at our financial 
institution, we will be required to take appropriate steps to block 
such access, including terminating your account.

    The purpose of the notice requirement is to help ensure cooperation 
from correspondent accountholders in denying Multibanka access to the 
U.S. financial system, as well as to increase awareness within the 
international financial community of the risks and deficiencies of 
Multibanka. However, FinCEN does not require or expect a covered 
financial institution to obtain a certification from its correspondent 
accountholders that indirect access will not be provided in order to 
comply with this notice requirement. Instead, methods of compliance 
with the notice requirement could include, for example, transmitting a 
one-time notice by mail, fax, or e-mail to a covered financial 
institution's correspondent account customers informing them that they 
may not provide Multibanka with access to the covered financial 
institution's correspondent account, or including such information in 
the next regularly occurring transmittal from the covered financial 
institution to its correspondent accountholders. FinCEN specifically 
solicits comments on the appropriate form, scope, and timing of the 
notice that would be required under the rule.
    A covered financial institution also would be required under this 
rulemaking to take reasonable steps to identify any indirect use of its 
correspondent accounts by Multibanka, to the extent that such indirect 
use can be determined from transactional records maintained by the 
covered financial institution in the normal course of business. For 
example, a covered financial institution would be expected to apply an 
appropriate screening mechanism to be able to identify a funds transfer 
order that on its face listed Multibanka as the originator's or 
beneficiary's financial institution, or otherwise referenced 
Multibanka. An appropriate screening mechanism could be the mechanism 
used by a covered financial institution to comply with sanctions 
programs administered by OFAC. FinCEN specifically solicits comments on 
the requirement under the proposed rule that a covered financial 
institution take reasonable steps to screen its correspondent accounts 
in order to identify any indirect use of such accounts by Multibanka.
    Notifying its correspondent accountholders and taking reasonable 
steps to identify any indirect use of its correspondent accounts by 
Multibanka in the manner discussed above are the minimum due diligence 
requirements under the proposed rule. Beyond these minimum steps, a 
covered financial institution should adopt a risk-based approach for 
determining what, if any, other due diligence measures it should 
implement to guard against the indirect use of its correspondents 
accounts by Multibanka, based on risk factors such as the type of 
services it offers and the geographic locations of its correspondent 
accountholders.
    A covered financial institution that obtains knowledge that a 
correspondent account is being used by a foreign bank to provide 
indirect access to Multibanka must take all appropriate steps to block 
such indirect access, including, where necessary, terminating the 
correspondent account. A covered financial institution may afford the 
foreign bank a reasonable opportunity to take corrective action prior 
to terminating the correspondent account. Should the foreign bank 
refuse to comply, or if the covered financial institution cannot obtain 
adequate assurances that the account will not be available to 
Multibanka, the covered financial institution must terminate the 
account within a commercially reasonable time. This means that the 
covered financial institution should not permit the foreign bank to 
establish any

[[Page 21368]]

new positions or execute any transactions through the account, other 
than those necessary to close the account. A covered financial 
institution may reestablish an account closed under the proposed rule 
if it determines that the account will not be used to provide banking 
services indirectly to Multibanka. FinCEN specifically solicits comment 
on the requirement under the proposed rule that a covered financial 
institution block indirect access to Multibanka once such indirect 
access is identified.
3. Reporting Not Required
    Section 103.191(b)(3) of the proposed rule clarifies that the rule 
does not impose any reporting requirement upon any covered financial 
institution that is not otherwise required by applicable law or 
regulation. A covered financial institution must, however, document its 
compliance with the requirement that it notify its correspondent 
accountholders that they may not provide Multibanka with access to the 
correspondent account maintained at the covered financial institution.

IV. Request for Comments

    FinCEN invites comments on all aspects of the proposal to prohibit 
the opening or maintaining of correspondent accounts for or on behalf 
of Multibanka, and specifically invites comments on the following 
matters:
    1. The appropriate form, scope, and timing of the notice to 
correspondent accountholders that would be required under the rule;
    2. The appropriate scope of the proposed requirement for a covered 
financial institution to take reasonable steps to identify any indirect 
use of its correspondent accounts by Multibanka;
    3. The appropriate steps a covered financial institution should 
take once it identifies an indirect use of one of its correspondent 
accounts by Multibanka; and
    4. The impact of the proposed special measure upon any legitimate 
transactions conducted with Multibanka by U.S. persons and entities, 
foreign persons, entities, and governments, and multilateral 
organizations doing legitimate business with persons, entities, or 
Latvia, or operating a legitimate business in Latvia.

V. Regulatory Flexibility Act

    It is hereby certified that this proposed rule will not have a 
significant economic impact on a substantial number of small entities. 
FinCEN understands that Multibanka maintains correspondent accounts 
with few institutions in the United States. Thus, the prohibition on 
maintaining such accounts will not have a significant impact on a 
substantial number of small entities. In addition, all U.S. persons, 
including U.S. financial institutions, should currently exercise some 
degree of due diligence in order to comply with U.S. sanctions programs 
administered by OFAC, which can easily be modified to monitor for the 
direct and indirect use of correspondent accounts by Multibanka. Thus, 
the special due diligence that would be required by this rulemaking--
i.e., the one-time transmittal of notice to correspondent 
accountholders, and the screening of transactions to identify any 
indirect use of correspondent accounts--is not expected to impose a 
significant additional economic burden upon small U.S. financial 
institutions. FinCEN invites comments from members of the public who 
believe there will be a significant economic impact on small entities.

VI. Paperwork Reduction Act

    The collection of information contained in this proposed rule is 
being submitted to the Office of Management and Budget for review in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)). Comments on the collection of information should be sent 
(preferably by fax (202-395-6974)) to Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, Office 
of Management and Budget, Paperwork Reduction Project (1506), 
Washington, DC 20503 (or by e-mail to Alexander--T.--Hunt@omb.eop.gov), 
with a copy to FinCEN by mail or e-mail at the addresses previously 
specified. Comments on the collection of information should be received 
by May 26, 2005. In accordance with the requirements of the Paperwork 
Reduction Act of 1995, 44 U.S.C. 3506(c)(2)(A), and its implementing 
regulations, 5 CFR 1320, the following information concerning the 
collection of information as required by 31 CFR 103.191 is presented to 
assist those persons wishing to comment on the information collection.
    The collection of information in this proposed rule is in 31 CFR 
103.191(b)(2)(i) and 31 CFR 103.191(b)(3)(i). The disclosure 
requirement in 31 CFR 103.191(b)(2)(i) is intended to ensure 
cooperation from correspondent accountholders in denying Multibanka 
access to the U.S. financial system, as well as to increase awareness 
within the international financial community of the risks and 
deficiencies of Multibanka. The information required to be maintained 
by 31 CFR 103.191(b)(3)(i) will be used by Federal agencies and certain 
self-regulatory organizations to verify compliance by covered financial 
institutions with the provisions of 31 CFR 103.191. The class of 
financial institutions affected by the disclosure requirement is 
identical to the class of financial institutions affected by the 
recordkeeping requirement. The collection of information is mandatory.
    Description of Affected Financial Institutions: Banks, broker-
dealers in securities, futures commission merchants and introducing 
brokers, and mutual funds maintaining correspondent accounts.
    Estimate Number of Affected Financial Institutions: 5,000.
    Estimated Average Annual Burden Hours Per Affected Financial 
Institution: The estimated average burden associated with the 
collection of information in this proposed rule is one hour per 
affected financial institution.
    Estimated Total Annual Burden: 5,000 hours.
    FinCEN specifically invites comments on: (a) Whether the proposed 
collection of information is necessary for the proper performance of 
the mission of FinCEN, including whether the information shall have 
practical utility; (b) the accuracy of FinCEN's estimate of the burden 
of the proposed collection of information; (c) ways to enhance the 
quality, utility, and clarity of the information required to be 
maintained; (d) ways to minimize the burden of the required collection 
of information, including through the use of automated collection 
techniques or other forms of information technology; and (e) estimates 
of capital or start-up costs and costs of operation, maintenance, and 
purchase of services to maintain the information.

VII. Executive Order 12866

    This proposed rule is not a significant regulatory action for 
purposes of Executive Order 12866, ``Regulatory Planning and Review.''

List of Subjects in 31 CFR Part 103

    Administrative practice and procedure, Banks and banking, Brokers, 
Counter-money laundering, Counter-terrorism, and Foreign banking.

Authority and Issuance

    For the reasons set forth in the preamble, part 103 of title 31 of 
the Code of Federal Regulations is proposed to be amended as follows:

[[Page 21369]]

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND 
FINANCIAL TRANSACTIONS

    1. The authority citation for part 103 is revised to read as 
follows:

    Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314, 
5316-5332; title III, secs. 311, 312, 313, 314, 319, 326, 352, Pub. 
L. 107-56, 115 Stat. 307.

    2. Subpart I of part 103 is proposed to be amended by adding new 
Sec.  103.191, as follows:


Sec.  103.191  Special measures against Multibanka.

    (a) Definitions. For purposes of this section:
    (1) Correspondent account has the same meaning as provided in Sec.  
103.175(d)(1)(ii).
    (2) Covered financial institution has the same meaning as provided 
in Sec.  103.175(f)(2) and also includes:
    (i) A futures commission merchant or an introducing broker 
registered, or required to register, with the Commodity Futures Trading 
Commission under the Commodity Exchange Act (7 U.S.C. 1 et seq.); and
    (ii) An investment company (as defined in section 3 of the 
Investment Company Act of 1940 (15 U.S.C. 80a-3)) that is an open-end 
company (as defined in section 5 of the Investment Company Act (15 
U.S.C. 80a-5)) and that is registered, or required to register, with 
the Securities and Exchange Commission under section 8 of the 
Investment Company Act (15 U.S.C. 80a-8).
    (3) Multibanka means any branch, office, or subsidiary of joint 
stock company Multibanka operating in Latvia or any other jurisdiction.
    (4) Subsidiary means a company of which more than 50 percent of the 
voting stock or analogous equity interest is owned by another company.
    (b) Requirements for covered financial institutions--(1) 
Prohibition on direct use of correspondent accounts. A covered 
financial institution shall terminate any correspondent account that is 
established, maintained, administered, or managed in the United States 
for, or on behalf of, Multibanka.
    (2) Special due diligence of correspondent accounts to prohibit 
indirect use. (i) A covered financial institution shall apply special 
due diligence to its correspondent accounts that is reasonably designed 
to guard against their indirect use by Multibanka. At a minimum, that 
special due diligence must include:
    (A) Notifying correspondent accountholders that they may not 
provide Multibanka with access to the correspondent account maintained 
at the covered financial institution; and
    (B) Taking reasonable steps to identify any indirect use of its 
correspondent accounts by Multibanka to the extent that such indirect 
use can be determined from transactional records maintained in the 
covered financial institution's normal course of business.
    (ii) A covered financial institution shall take a risk-based 
approach when deciding what, if any, other due diligence measures it 
should adopt to guard against the indirect use of its correspondent 
accounts by Multibanka.
    (iii) A covered financial institution that obtains knowledge that a 
correspondent account is being used by the foreign bank to provide 
indirect access to Multibanka, shall take all appropriate steps to 
block such indirect access, including, where necessary, terminating the 
correspondent account.
    (3) Recordkeeping and reporting. (i) A covered financial 
institution is required to document its compliance with the notice 
requirement set forth in paragraph (b)(2)(i)(A) of this section.
    (ii) Nothing in this section shall require a covered financial 
institution to report any information not otherwise required to be 
reported by law or regulation.

    Dated: April 21, 2005.
William J. Fox,
Director, Financial Crimes Enforcement Network.
[FR Doc. 05-8279 Filed 4-21-05; 1:18 pm]
BILLING CODE 4810-02-P



Last Updated 04/29/2005 communications@fdic.gov