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FIL-35-2005 Attachment

[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