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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 21369-21376]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ap05-19]                         

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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA82

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

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 VEF Banka (VEF) 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-AA82, 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-
AA82 in the subject line of the message.
     Mail: FinCEN, P.O. Box 39, Vienna, VA 22183. Include RIN 
1506-AA82 in the body of the text.
    Instructions: It is preferable for comments to be submitted by 
electronic mail because paper mail in the 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

[[Page 21370]]

``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. VEF

    In this rulemaking, FinCEN proposes the imposition of the fifth 
special measure (31 U.S.C. 5318A(b)(5)) against VEF, 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.
    VEF is headquartered in Riga, the capital of the Republic of 
Latvia. VEF is one of the smallest of Latvia's 23 banks, reported to 
have approximately $80 million in assets and 87 employees. It has one 
subsidiary, Veiksmes l[imacr]zings, which offers financial leasing and 
factoring services. In addition to its headquarters in Riga, VEF has 
one branch in Riga, and one representative office in the Czech 
Republic. VEF offers corporate and private banking services, issues a 
variety of credit cards for non-Latvians, and provides currency 
exchange through Internet banking services, i.e. virtual currencies. In 
addition, according to VEF's financial statements, it maintains 34 
correspondent accounts with countries worldwide, including at least one 
account in the United States.
    VEF offers confidential banking services for non-Latvian customers. 
In fact, VEF's Web site advertises, ``VEF Banka guarantees keeping in 
secret customer information (information about customer's operations, 
account balance and other bank operations). It guarantees not revealing 
this information to third person except the cases, when the customer 
has agreed that the information can be revealed or when it is demanded 
by the legislation of the Republic of Latvia.'' Another section of 
VEF's Web site lists documents (from countries frequently associated 
with money laundering activities) that are required to open a VEF 
corporate bank account. According to the bank's financial statements, a 
large portion of the bank's deposits comes from private companies. Less 
than 20 percent of these deposits are from individuals or companies 
located in Latvia. A large number of foreign depositors or a large 
percentage of assets in foreign funds are both indicators that a bank 
may be used to launder money. Additionally, approximately 75 percent of 
the bank's fee income and commissions are generated from payment cards 
and money transfers, both incoming and outgoing, from correspondent 
banks.
    The bank's dealings with foreign shell companies, provision of 
confidential banking services, and lack of controls and procedures 
adequate to the risks involved, make VEF vulnerable to money laundering 
and other financial

[[Page 21371]]

crimes. As a result of the significant number of credit and debit 
transactions involving entities that appear to be shell corporations 
banking at VEF, some U.S. financial institutions have already closed 
correspondent relationships with VEF.

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. 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. Similarly, as 
mentioned above, a disproportionate amount of foreign depositors or 
assets 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 VEF, 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 ``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 VEF 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 VEF is a financial 
institution of primary money laundering concern based on a number of 
factors, including:
1. The Extent to Which VEF Has Been Used To Facilitate or Promote Money 
Laundering in or Through the Jurisdiction
    FinCEN has determined, based upon a variety of sources, that VEF is 
being used to facilitate or promote money laundering and other 
financial crimes. Proceeds of illicit activity have been transferred by 
shell companies with no apparent legitimate business purpose to or 
through correspondent accounts held by VEF at U.S. financial 
institutions. As already stated, criminals frequently use shell 
companies to launder the proceeds of their crimes. A significant number 
of companies, organized in various countries including the United 
States, have used accounts at VEF to move millions of U.S. dollars 
around the world. In a four-month period, VEF initiated or accepted on 
behalf of a single shell corporation over 300 wire transfers totaling 
more than $26 million, involving such countries as the United Arab 
Emirates, Kuwait, Russia, India, and China. In addition, for a two-year 
period, VEF transferred over $200 million on behalf of two highly 
suspect corporate accountholders, which is a substantial amount of wire 
activity for VEF's size.

[[Page 21372]]

    Many of the private shell companies holding accounts at VEF lack 
proper documentation of ownership, annual reports, and the reason for 
the business transactions, while other companies had no listed 
telephone numbers. Due to concerns about transactions by such companies 
through accounts at VEF, some U.S. financial institutions have already 
terminated their correspondent relationships with VEF.
    Several accountholders at VEF have repeatedly engaged in a pattern 
of activity indicative of money laundering. In fact, several VEF 
accountholders are linked to an international Internet crime 
organization that has been indicted in federal court for electronic 
theft of personal identifying information, credit card and debit card 
fraud, and the production and sale of false identification documents. 
The defendants and their co-conspirators commonly sent and received 
payment for illicit merchandise and services via money transfers or 
digital currency services such as ``E-Gold'' or ``Web Money'' 
transfers. As discussed below, Web Money purportedly holds an account 
at VEF.
    One reason that Internet financial crime groups are interested in 
opening accounts at VEF is that the ``Visa Electron'' card associated 
with a VEF account has no limit on the amount of money that can be 
withdrawn from an ATM. The ability to make limitless ATM withdrawals is 
an essential component to the execution of large financial fraud 
schemes typically associated with carding networks. In addition, the 
U.S. government has reason to believe that individuals who wish to 
obtain a Web Money Card will be issued a card linked to a sub-account 
from Web Money Card's main account at VEF. Criminals who have applied 
for, obtained, and used Web Money Cards claim that VEF requires a 
notarized copy of a photo identification document to open an account. 
The legitimacy of these documents and the notary stamp, however, are 
reportedly never verified by VEF. Given the level of sophistication of 
many of these criminals, obtaining high-quality fraudulent 
identification documents, including a fraudulent notary's stamp, is not 
a difficult task. Through Web Money's accounts at VEF, these online 
criminal groups have used VEF to launder their illicit proceeds.
2. The Extent to Which VEF Is Used for Legitimate Business Purposes in 
the Jurisdiction
    It is difficult to determine the extent to which VEF 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 VEF's business is with shell companies. As 
already stated, the bank has a reputation for servicing foreign shell 
companies as evidenced by the many Web sites advertising bank account 
opening services for such entities. VEF is an important banking 
resource for such companies who use VEF to access the international 
financial system to pursue illicit financial activities. FinCEN 
believes that any legitimate use of VEF 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 VEF 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 VEF, 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 
VEF is being used to promote or facilitate international money 
laundering. Currently, there are no protective measures that 
specifically target VEF. Thus, finding VEF 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 VEF 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 VEF, but also would require them to 
take reasonable steps to prevent indirect use of correspondent services 
by VEF 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 VEF 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 VEF 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 VEF
    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 VEF, and to require those 
domestic financial institutions and agencies to screen their 
correspondents for nested correspondent accounts held by VEF. 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 VEF to the U.S. financial system.
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, VEF. As a 
corollary to this measure,

[[Page 21373]]

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 VEF. 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 VEF. There is a minimal burden involved in 
transmitting a one-time notice to all correspondent accountholders 
concerning the prohibition on indirectly providing services to VEF. 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 VEF
    This proposed rulemaking targets VEF specifically; it does not 
target a class of financial transactions (such as wire transfers) or a 
particular jurisdiction. VEF 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 VEF 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 VEF 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 U.S. 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 VEF 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, VEF. 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 VEF. 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 VEF 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 VEF, 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 VEF, based on 
risk factors such as the type of services it offers and geographic 
locations of its correspondents.

A. 103.192(a)--Definitions

1. Correspondent Account
    Section 103.192(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 103.192(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 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

[[Page 21374]]

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. VEF
    Section 103.192(a)(3) of the proposed rule defines VEF to include 
all branches, offices, and subsidiaries of VEF operating in Latvia or 
in any other jurisdiction. Veiksmes lizings, 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 VEF.

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, VEF, 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 103.192(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, VEF. 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, VEF.
2. Special Due Diligence of Correspondent Accounts To Prohibit Indirect 
Use
    As a corollary to the prohibition on maintaining correspondent 
accounts directly for VEF, section 103.192(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 VEF. At a minimum, that special due diligence 
must include notifying correspondent accountholders that they may not 
provide VEF 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 103.192, we are prohibited from 
establishing, maintaining, administering or managing a correspondent 
account for, or on behalf of, joint stock company VEF Banka (VEF) or 
any of its subsidiaries, including Veiksmes l[imacr]zings. The 
regulations also require us to notify you that you may not provide 
VEF or any of its subsidiaries with access to the correspondent 
account you hold at our financial institution. If we become aware 
that VEF 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 VEF access to the U.S. 
financial system, as well as to increase awareness within the 
international financial community of the risks and deficiencies of VEF. 
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 VEF 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 VEF, 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 VEF as the originator's or beneficiary's financial 
institution, or otherwise referenced VEF. 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 VEF.
    Notifying its correspondent accountholders and taking reasonable 
steps to identify any indirect use of its correspondent accounts by VEF 
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 VEF, 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 VEF 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 VEF, 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 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 VEF. FinCEN specifically solicits comment on the 
requirement under the proposed rule that a covered financial 
institution block indirect access to VEF once such indirect access is 
identified.
3. Reporting Not Required
    Section 103.192(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

[[Page 21375]]

compliance with the requirement that it notify its correspondent 
accountholders that they may not provide VEF 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 VEF, 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 VEF;
    3. The appropriate steps a covered financial institution should 
take once it identifies an indirect use of one of its correspondent 
accounts by VEF; and
    4. The impact of the proposed special measure upon any legitimate 
transactions conducted with VEF 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 VEF maintains a correspondent account at one 
large bank 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 VEF. 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 103.192 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 
103.192(b)(2)(i) and 31 CFR 103.192(b)(3)(i). The disclosure 
requirement in 31 CFR 103.192(b)(2)(i) is intended to ensure 
cooperation from correspondent accountholders in denying VEF access to 
the U.S. financial system, as well as to increase awareness within the 
international financial community of the risks and deficiencies of VEF. 
The information required to be maintained by 31 CFR 103.192(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 103.192. 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:

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.  103.192, as follows:


Sec.  103.192  Special measures against VEF.

    (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

[[Page 21376]]

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) Subsidiary means a company of which more than 50 percent of the 
voting stock or analogous equity interest is owned by another company.
    (4) VEF means any branch, office, or subsidiary of joint stock 
company VEF Banka operating in Latvia or any other jurisdiction.
    (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, VEF.
    (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 VEF. At a minimum, that special 
due diligence must include:
    (A) Notifying correspondent accountholders that they may not 
provide VEF 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 VEF 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 VEF.
    (iii) A covered financial institution that obtains knowledge that a 
correspondent account is being used by the foreign bank to provide 
indirect access to VEF, 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. 05-8280 Filed 4-21-05; 1:18 pm]

BILLING CODE 4810-02-P



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