[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