[Federal Register Volume 68, Number 74 (Thursday, April 17, 2003)]
[Proposed Rules]
[Pages 18917-18922]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-9410]


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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA43


Financial Crimes Enforcement Network; Imposition of Special 
Measures Against the Country of Nauru

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

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Department of the Treasury and FinCEN are issuing this 
proposed rule, pursuant to the provisions of section 311 of the Uniting 
and Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), to 
impose ``special measures'' against Nauru. Nauru was previously 
designated as a country of primary money laundering concern pursuant to 
section 311 on December 20, 2002, a pre-requisite for the imposition of 
special measures.

DATES: Written comments may be submitted on or before May 19, 2003.

ADDRESSES: Commenters are encouraged to submit comments by electronic 
mail because paper mail in the Washington, DC, area may be delayed. 
Comments submitted by electronic mail may be sent to 
[email protected] with the caption in the body of the text, 
``Attention: Section 311 Special Measures Regulations.'' Comments may 
also be submitted by paper mail to FinCEN, P.O. Box 39, Vienna, VA 
22183, Attn: Section 311 Special Measures Regulations. Comments should 
be sent by one method only. 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 telephoning (202) 354-6400 (not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Office of the General Counsel, 
Department of the Treasury, (202) 622-1925; Office of the Assistant 
General Counsel for Banking and Finance (Treasury), (202) 622-0480; or 
the Office of Chief Counsel (FinCEN), (703) 905-3590 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

I. Background

    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 (USA PATRIOT Act) (Public 
Law 107-56) (the Act). Title III of the Act makes a number of 
amendments to the anti-money laundering provisions of the Bank Secrecy 
Act (BSA) that are codified in subchapter II of chapter 53 of title 31, 
United States Code. These amendments are intended to promote the 
prevention, detection, and prosecution of international money 
laundering and the financing of terrorism.
    Section 311 of the Act added section 5318A to the BSA. Section 
5318A gives the Secretary of the Treasury (Secretary) the authority to 
designate a foreign jurisdiction, institution(s), class(es) of 
transactions, or type(s) of account(s) as a ``primary money laundering 
concern'' and to impose certain ``special measures'' with respect to 
such jurisdiction, institution(s), class(es) of transactions, or 
type(s) of account(s). On December 20, 2002, the Secretary designated 
Nauru as a jurisdiction of primary money laundering concern pursuant to 
section 5318A.\1\
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    \1\ 67 FR 78859 (December 26, 2002).
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    Section 5318A identifies the factors that the Secretary must 
consider and the agencies with which he must consult before designating 
a primary money laundering concern. Upon designation, section 5318A 
sets forth five potential special measures, the factors to be 
considered in selecting these measures, and the agencies with which the 
Secretary must consult before imposing special measures on the 
designee.
    Section 5318A gives the Secretary the authority to bring additional 
and useful pressure on those jurisdictions and institutions that pose 
money laundering concerns to encourage them to eliminate the bases for 
these concerns. Through the imposition of various special measures, the 
Secretary can gain more information about the concerned

[[Page 18918]]

jurisdictions, institutions, transactions, and accounts, can more 
effectively monitor the respective institutions, transactions, and 
accounts, and can protect U.S. financial institutions from involvement 
with jurisdictions, institutions, transactions, or accounts that pose a 
money laundering concern.

A. Required Consultations, and Statutory Factors To Consider, Prior to 
Designating a Primary Money Laundering Concern

    Prior to making a finding that a foreign jurisdiction, 
institution(s), class(es) of transactions, or type(s) of account(s) is 
a primary money laundering concern, the Secretary is required to 
consult with both the Secretary of State and the Attorney General.
    In addition to these consultations, the Secretary is required by 
the statute to consider ``such information as the Secretary determines 
to be relevant,'' including the following ``potentially relevant 
[jurisdictional] factors'':
    [sbull] Evidence that organized criminal groups, international 
terrorists, or both, have transacted business in the jurisdiction;
    [sbull] The extent to which the jurisdiction or financial 
institutions operating in the jurisdiction offer bank secrecy or 
special regulatory advantages to non-residents or non-domiciliaries of 
the jurisdiction;
    [sbull] The substance and quality of administration of the bank 
supervisory and counter-money laundering laws of the jurisdiction;
    [sbull] The relationship between the volume of financial 
transactions occurring in the jurisdiction and the size of the economy 
of the jurisdiction;
    [sbull] The extent to which the jurisdiction is characterized as an 
offshore banking or secrecy haven by credible international 
organizations or multilateral expert groups;
    [sbull] Whether the United States has a mutual legal assistance 
treaty with the jurisdiction, and the experience of United States law 
enforcement officials and regulatory officials in obtaining information 
about transactions originating in or routed through or to such 
jurisdiction; and
    [sbull] The extent to which the jurisdiction is characterized by 
high levels of official or institutional corruption.
    Once the Secretary, after having consulted with the Secretary of 
State and the Attorney General and having considered the factors set 
forth immediately above, has made a finding that reasonable grounds 
exist for concluding that a jurisdiction, etc., is a primary money 
laundering concern, one or more of the five statutorily permitted 
``special measures'' may be imposed following the appropriate 
consultations as described below.\2\
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    \2\ For the purposes of this action, the required consultation 
was performed at the staff level.
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B. Special Measures

    There are five specific ``special measures'' that can be imposed, 
either individually, jointly, or in any combination:
1. Recordkeeping and Reporting of Certain Financial Transactions
    The Secretary may require domestic financial institutions and 
domestic financial agencies to maintain and/or to file reports 
concerning the aggregate amount of transactions or the specifics of 
each transaction with the primary money laundering concern. The records 
and reports shall include whatever information the Secretary deems to 
be relevant, including, but not limited to:
    [sbull] The identity and address of the participants in a 
transaction or relationship;
    [sbull] The legal capacity in which the participant is acting;
    [sbull] The identity of the beneficial owner of the funds involved; 
and
    [sbull] A description of the transaction.
2. Information Relating to Beneficial Ownership
    The Secretary may require domestic financial institutions and 
domestic financial agencies ``to take such steps as the Secretary may 
determine to be reasonable and practicable to obtain and retain 
information concerning the beneficial ownership of any account opened 
or maintained in the United States by a foreign person (other than a 
foreign entity whose shares are subject to public reporting 
requirements or are listed and traded on a regulated exchange or 
trading market)'' involving the primary money laundering concern.
3. Information Relating to Certain Payable-Through Accounts
    The Secretary may require domestic financial institutions and 
domestic financial agencies that open or maintain a payable-through 
account in the United States involving the primary money laundering 
concern to: (1) Identify each customer (and representative) who is 
permitted to use the account or whose transactions are routed through 
the account; and (2) obtain information about each such customer (and 
representative) that is substantially comparable to that which a U.S. 
depository institution obtains in the ordinary course of business with 
respect to its customers residing in the United States.
4. Information Relating to Certain Correspondent Accounts
    The Secretary can require domestic financial institutions and 
domestic financial agencies that open or maintain a correspondent 
account in the United States involving the primary money laundering 
concern to: (1) Identify each customer (and representative) who is 
permitted to use the account or whose transactions are routed through 
the account; and (2) obtain information about each such customer (and 
representative) that is substantially comparable to that which a U.S. 
depository institution obtains in the ordinary course of business with 
respect to its customers residing in the United States.
5. Prohibitions or Conditions on Opening or Maintaining Certain 
Correspondent or Payable-Through Accounts
    The Secretary, after the respective consultations, can prohibit, or 
can impose conditions on, domestic financial institutions and financial 
agencies opening or maintaining in the United States any correspondent 
account or payable-through account for or on behalf of a foreign 
financial institution if the account involves the primary money 
laundering concern.

C. Additional Required Consultations, and Statutory Factors To Be 
Considered, in Advance of Imposing Any of the Special Measures

    Prior to determining which special measure(s) to impose, the 
Secretary must consult with the Chairman of the Board of Governors of 
the Federal Reserve, any other appropriate Federal banking agency, the 
Secretary of State, the Securities and Exchange Commission (SEC), the 
Commodity Futures Trading Commission (CFTC), the National Credit Union 
Administration (NCUA), and, in the sole discretion of the Secretary, 
``such other agencies and interested parties as the Secretary may find 
to be appropriate.''
    In determining generally which special measures to select and to 
impose, the Secretary, in consultation with the agencies and 
``interested parties'' set forth above, must consider the following 
factors:
    [sbull] Whether similar action has been or is being taken by other 
nations or multilateral groups;
    [sbull] 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;

[[Page 18919]]

    [sbull] 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 jurisdiction, institution, or class 
of transactions; and
    [sbull] The effect of the action on United States national security 
and foreign policy.
    In addition to (1) the consultations for the designation of a 
primary money laundering concern, and (2) the consultations with the 
larger group of agencies for determining which of the special measures 
to impose, the Secretary, in determining specifically whether to impose 
the fifth special measure, must consult with the Secretary of State, 
the Attorney General, and the Chairman of Board of Governors of the 
Federal Reserve.
    Last, the Secretary, in determining whether to apply one or more 
special measures only to a foreign institution(s), transaction(s), 
class(es) of transactions, or type(s) of account(s) within a particular 
jurisdiction--as opposed to applying the special measure more generally 
to the foreign jurisdiction itself--must consult with the Secretary of 
State and the Attorney General, and shall take into consideration the 
following ``institutional factors'':
    [sbull] The extent to which such financial institution(s), 
transaction(s), class(es) of transactions, or type(s) of account(s) are 
used to facilitate or promote money laundering in or through the 
jurisdiction;
    [sbull] The extent to which such institutions, transaction(s), 
class(es) of transaction(s), or type(s) of account(s) are used for 
legitimate business purposes in the jurisdiction; and
    [sbull] The extent to which such action is sufficient to ensure, 
with respect to transactions involving the jurisdiction and 
institutions 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.

D. Procedures for Imposing Special Measures

    Pursuant to section 5318A, any of the first four ``special 
measures'' can be imposed by order, regulation, or as otherwise 
``permitted by law.'' If an order is issued, it can remain in effect 
for 120 days, unless authorized by a regulation promulgated before the 
end of the 120-day period. The fifth ``special measure'' can only be 
imposed through the issuance of a regulation.

II. Nauru

A. Background

    Nauru is a small island of approximately 10 square miles that has a 
population of only approximately 12,000 people. At one point in time, 
the island had one of the highest per capita incomes in the developing 
world due to the mining and export of phosphates, a funding source 
expected to be completely depleted within five to ten years. As a 
result of the phosphate mining, the central part of the island, once 
thriving with vegetation and wildlife, has become uninhabitable and 
only the perimeter of the island remains available for habitation. This 
perimeter itself is vulnerable to storms and the movement of the ocean.
    Although Nauru at one point in time was relatively wealthy, most of 
the funds emanating from the phosphate mining and originally contained 
in the country's trust funds have been depleted through waste, poor 
investments, and fraud. As a result, the country has been borrowing 
heavily to finance fiscal deficits. Currently, the basic infrastructure 
of the island is so poor that electric, water, and phone service is 
available only on a limited and sporadic basis.

B. Offshore Shell Banks in Nauru

    In an effort to raise funds, the island has resorted to the selling 
of passports (or ``economic citizenships'') to non-resident foreigners, 
and, of greater concern, the selling of offshore banking licenses. 
Nauru is notorious for permitting the establishment of offshore shell 
banks with no physical presence in Nauru or in any other country. The 
evidence indicates that the entities that obtain these offshore banking 
licenses are subject to cursory and wholly inadequate review by the 
country's officials, lack any credible on-going supervision, and 
maintain no banking records that Nauru or any other jurisdiction can 
review. In addition, one of the common requirements imposed by Nauru on 
these offshore banks is that they not engage in economic transactions 
involving either the currency of Nauru (currently the Australian 
dollar) or its citizens or residents. Consequently, these offshore 
shell banks have no apparent legitimate connection with the economy or 
business activity of Nauru. Indeed, only one bank appears to be 
physically located in Nauru, the ``Bank of Nauru.'' It is a local 
community bank that also serves as the Central Bank.
    In 2000, FinCEN reported that 400 offshore banks had been granted 
licenses by Nauru.\3\ It has been verified by on-site reports that a 
1,000 square foot wooden structure is ``home'' to these banks that have 
no physical or legal residence anywhere in the world. The United States 
Government has been able to verify the names of 161 of the institutions 
licensed by Nauru.\4\ These are institutions for which the limited 
information available indicates that there is a strong likelihood that 
they are shell banks that are not subject to effective banking 
supervision.
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    \3\ FinCEN Advisory Issue 21 (July 2000).
    \4\ A list of these institutions was presented as Appendix A to 
the December 20, 2002, designation of Nauru as a jurisdiction of 
primary money laundering concern.
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C. FATF Designation

    As a consequence of the current practices of Nauru, the Financial 
Action Task Force on Money Laundering (FATF) placed Nauru on the ``Non-
Cooperative Countries and Territories'' (NCCT) list in June 2000 for 
maintaining an inadequate anti-money laundering regime. According to 
FATF, Nauru's anti-money laundering weaknesses included, but were not 
limited to, the following: money laundering was not a criminal offense; 
offshore banks licensed by Nauru were not required to maintain customer 
identification or transaction records; Nauruan financial institutions 
were under no obligation to report suspicious transactions; and Nauru 
maintained strong bank secrecy laws. In July 2000, FinCEN issued an 
advisory to U.S. financial institutions, warning them to give enhanced 
scrutiny to all financial transactions originating in or routed to or 
through Nauru, or involving entities organized or domiciled, or persons 
maintaining accounts, in Nauru. In addition, the Office of the 
Comptroller of the Currency has issued 15 Alerts concerning offshore 
shell banks located in Nauru that were potentially attempting to engage 
in the business of banking in the United States without authority.
    In June of 2001, FATF determined that Nauru had made insufficient 
progress towards remedying deficiencies in its anti-money laundering 
regime and warned Nauru that FATF would impose countermeasures by 
September 30, 2001, if Nauru failed to address these deficiencies.
    On August 28, 2001, Nauru passed the Anti-Money Laundering Act of 
2001 (the AML Act). On September 7, 2001, however, FATF indicated that 
the AML Act was not consistent with international standards because it 
did not apply to the numerous offshore

[[Page 18920]]

banks licensed by Nauru. In response to FATF pressure, on December 6, 
2001, Nauru passed amendments to its AML Act. Nonetheless, according to 
FATF, the revised anti-money laundering law that now exists provides 
for a wholly inadequate anti-money laundering (AML) legislative and 
regulatory regime. In addition, Nauru has not yet addressed the 
remaining and most important deficiency of its AML legislation, that 
is, the inadequate procedures for licensing, regulating, and 
supervising its offshore banks. Thus, despite repeated warnings by FATF 
of its concern with Nauru's practices, and the clear consequences of 
not amending its practices, Nauru has not shouldered its responsibility 
to establish a sufficient AML regime.
    On July 22, 2002, FATF wrote Nauruan officials to express FATF's 
concern about the practice in Nauru of issuing licenses to offshore 
shell banks and asked Nauru to cease licensing such entities. Nauru, 
however, has not ceased this activity.

D. Designation of Nauru as a Primary Money Laundering Concern and 
Imposition of Counter-Measures

    After reviewing Nauru in light of the statutory factors set forth 
above, on December 20, 2002, the Treasury designated Nauru as a country 
of primary money laundering concern under section 5318A of the BSA.\5\ 
As a result of this designation, and based upon an analysis of the 
entirety of circumstances in Nauru, Treasury has determined that 
grounds exist for the imposition of a special measure upon Nauru. Based 
upon its consideration of the following factors, Treasury intends to 
impose on Nauru the fifth special measure authorized by section 5318A.
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    \5\ Supra n1.
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E. Factors To Consider in Imposing Special Measures Under Section 5318A

1. Whether Similar Action Has Been or Is Being Taken by Other Nations 
or Multilateral Groups
    As a result of FATF's call on December 5, 2001, for the imposition 
of counter-measures against Nauru, 27 FATF member countries, including 
all G-7 countries, have taken action against Nauru.\6\
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    \6\ Specifically, the countries have imposed stringent 
requirements for identifying clients and beneficial owners before 
business relationships are established with individuals or companies 
from Nauru. In addition, the countries have required enhanced and 
systematic reporting of financial transactions involving Nauru. 
Also, the countries have required that, in considering requests for 
approving the establishment in FATF member countries of subsidiaries 
or branches or representative offices of banks from Nauru, the 
country take into account the fact that the applicant bank is from 
an NCCT. Last, the countries have issued warnings to non-financial 
sector businesses that transactions with entities within NCCTs might 
run the risk of money laundering. (Source: FATF Reports).
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2. 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
    Imposing sanctions against Nauru under section 5318A should not 
result in any competitive disadvantage, including any undue compliance 
cost or burden, to financial institutions in the United States. First, 
FATF member countries and the G-7 countries have already responded to 
FATF's call for the imposition of counter-measures against Nauru. 
Second, BSA section 5318(j) already requires the termination of 
correspondent accounts maintained by U.S. depository institutions and 
securities broker-dealers for foreign shell banks.\7\ As a result, 
since we understand that most, if not all, Nauru-licensed banks are 
shells (other than the Central Bank of Nauru), most transactions 
between Nauru and U.S. financial institutions have or should already 
have ceased.
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    \7\ See Part III.A. infra.
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3. 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 Jurisdiction, Institution, or Class 
of Transactions
    The action against Nauru should have no significant adverse 
systemic impact on the international payment system or on legitimate 
business activities because of the small size of the economy and the 
absence of any meaningful, legitimate international business.
4. The Effect of the Action on United States National Security and 
Foreign Policy
    The action is expected to have virtually no effect on United States 
national security or foreign policy.
    The Secretary intends to impose the fifth special measure against 
Nauru pursuant to section 5318A. That special measure will prohibit 
covered U.S. financial institutions from opening or maintaining in the 
United States any correspondent account, or payable-through account, 
for a foreign financial institution if that account is maintained for, 
or on behalf of, a Nauru financial institution.

III. Section-by-Section Analysis

A. Overview

    This proposed rule is designed to deny Nauru financial institutions 
access to the U.S. financial system through correspondent accounts. The 
proposed rule would prohibit certain U.S. financial institutions from 
maintaining correspondent accounts for, or on behalf of, a Nauru 
financial institution. Furthermore, if a U.S. financial institution 
covered by this proposed rule learns that a correspondent account that 
it maintains for a foreign bank is being used to provide services 
indirectly to a Nauru financial institution, the U.S. financial 
institution must terminate the correspondent account of the foreign 
bank.
    On September 26, 2002, Treasury published in the Federal Register a 
final rule implementing sections 313 and 319(b) of the Act (the Section 
313/319 Rule).\8\ That rule, among other things, prohibits certain 
financial institutions from providing correspondent accounts to foreign 
shell banks, and requires such financial institutions to take 
reasonable steps to ensure that correspondent accounts provided to 
foreign banks are not being used to provide banking services indirectly 
to foreign shell banks. There will be significant overlap between the 
Section 313/319 Rule and this proposed rule for those financial 
institutions covered by the Section 313/319 Rule, although they are 
quite distinct, as described below.
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    \8\ 67 FR 60562 (September 26, 2002) (codified at 31 CFR 
103.177).
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B. Section 103.184 Definitions

    Correspondent account. Section 103.184(a)(1) of the proposed rule's 
definition of correspondent account is the definition contained in 31 
U.S.C. 5138A(e) (as added by section 311 of the Act). Section 5138A(e) 
defines the term to mean an account established to receive deposits 
from, make payments on behalf of, a foreign financial institution, or 
handle other financial transactions related to such institution. 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 financial institution, including payable-
through accounts. In the case of securities broker-dealers, futures 
commission merchants, introducing brokers, and mutual funds, a 
correspondent account would include any account that permits the 
foreign financial institution to

[[Page 18921]]

engage in: trading in securities and futures, funds transfers, or other 
types of financial transactions. Treasury is using the same definition 
for purposes of the proposed rule as that established in the Section 
313/319 Rule with two notable exceptions: (1) the term also applies to 
such accounts maintained by futures commission merchants and 
introducing brokers as well as mutual funds; and (2) the definition 
applies to such accounts maintained for any Nauru financial 
institution, as opposed to just Nauru banks.
    Covered financial institution. Section 103.184(a)(2) of the 
proposed rule defines covered financial institution to include those 
financial institutions included in the definition under the Section 
313/319 Rule, as well as futures commission merchants, introducing 
brokers, and mutual funds. The term is therefore defined to mean all of 
the following: any insured bank (as defined in section 3(h) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(h)); a commercial bank or 
trust company; a private banker; an agency or branch of a foreign bank 
in the United States; a credit union; a thrift institution; a 
corporation acting under section 25A of the Federal Reserve Act (12 
U.S.C. 611 et seq.); a broker or dealer registered or required to be 
registered 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 
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 pursuant to that Act. Futures commission 
merchants, introducing brokers, and mutual funds are being added in 
recognition of their offering of correspondent accounts within the 
meaning of 31 U.S.C. 5318A(e).
    Nauru financial institution. Section 103.184(a)(3) of the proposed 
rule defines Nauru financial institution to include all foreign banks 
licensed by Nauru (other than the Central Bank of Nauru) and any other 
person organized under the law of Nauru who conducts as a business one 
or more of the following activities or operations on behalf of 
customers: trading in (1) money market instruments; (2) exchange, 
interest rate, and index instruments; (3) transferable securities; and 
(4) commodity futures. The definition of foreign bank is that contained 
in 31 CFR 103.11(o). The inclusion in this definition of financial 
institutions other than depository institutions is done in recognition 
that these activities are alternate viable routes for money laundering 
activity.

C. Requirements for Covered Financial Institutions

    Prohibition on correspondent accounts. Section 103.184(b)(1) of the 
proposed rule would prohibit all covered financial institutions from 
establishing, maintaining, administering, or managing a correspondent 
account in the United States for, or on behalf of, a Nauru financial 
institution. Based on Treasury's understanding that the only banks in 
Nauru (other than the Central Bank) are shell banks, depository 
institutions and securities broker-dealers are already subject to 
essentially this same prohibition under the Section 313/319 Rule, 
subject to the inclusion in the proposed rule of certain additional 
Nauru financial institutions. The prohibition would require the 
additional covered financial institutions to review their account 
records to determine that they have no customers that are Nauru 
financial institutions.
    Termination of known indirect accounts. In addition, section 
103.184(b)(2) of the proposed rule would require a covered financial 
institution to terminate immediately any correspondent account which it 
currently establishes, maintains, administers, or manages for, or on 
behalf of, a foreign bank, if it obtains actual knowledge that the 
foreign bank is using this account to provide banking services 
indirectly to a Nauru financial institution. The proposed rule would 
not require covered financial institutions to review or investigate 
every account they maintain for foreign banks to ascertain whether such 
foreign banks are providing services to Nauru financial institutions. 
Instead, covered financial institutions must terminate such an account 
only if they become aware that a foreign bank is using its 
correspondent account to provide banking services indirectly to a Nauru 
financial institution. This distinction is significant and in contrast 
to the obligation under the Section 313/319 Rule, which imposed a new 
due diligence requirement on covered financial institutions to take 
reasonable steps to ensure that their foreign bank customers were not 
providing services to shell banks. This proposed rule would rely on 
existing due diligence procedures and not require covered financial 
institutions to make a separate inquiry of their foreign bank customers 
concerning Nauru financial institutions.
    Reporting and recordkeeping not required. Section 103.184(b)(3) of 
the proposed rule states that nothing in the proposed rule imposes any 
reporting or recordkeeping requirement upon any covered financial 
institution that is not otherwise required by applicable law or 
regulation. If a covered financial institution that is subject to the 
Section 313/319 Rule (depository institution or securities broker-
dealer) has previously received a certification or other information 
from a Nauru bank pursuant to that Rule in which it purports not to be 
a shell bank, this proposed rule would still require the termination of 
the account. More specifically, the safe harbor provisions of the 
Section 313/319 Rule will have no application to the measures that 
would be imposed under this proposed rule.
    Section 5318A authorizes Treasury to prohibit a broad range of 
financial dealings with a country of primary money laundering concern. 
Indeed, the statute affords Treasury the authority to require the 
termination of any correspondent account that involves the primary 
money laundering concern. In the proposed rule, Treasury has taken a 
relatively conservative approach to this countermeasure by requiring 
only the termination of direct correspondent accounts with a Nauru 
financial institution and the termination of accounts for other foreign 
banks only when the U.S. institution has actual knowledge that the 
account is being used to provide services to a Nauru financial 
institution indirectly. In view of all the facts and circumstances, 
this more limited application is appropriate. Treasury notes, however, 
that the circumstances surrounding future designations may warrant the 
imposition of countermeasures that reach much further into nested 
financial relationships with the primary money laundering concern.

IV. Public Comments Requested

    The Department of the Treasury invites comments from all interested 
persons, on all aspects of this rulemaking, and specifically seeks 
comments from the financial sector, including domestic financial 
institutions and domestic financial agencies, concerning the 
appropriateness and effectiveness of this particular special measure, 
the ability to comply with special measure five on Nauru, and any 
competitive disadvantage, cost, or burden associated with compliance.

V. Regulatory Flexibility Act

    It is hereby certified that this proposed rule will not have a 
significant economic impact on a substantial

[[Page 18922]]

number of small entities. Financial institutions described in section 
103.175(f)(2) are currently prohibited from establishing or maintaining 
correspondent accounts in the United States for, or on behalf of, a 
foreign shell bank. This rule would make it clear that all banks 
licensed by Nauru (other than the Central Bank of Nauru) are shell 
banks notwithstanding that such a bank may have provided a 
certification that it is not a shell bank.
    With respect to futures commission merchants, introducing brokers, 
and open-end investment companies, Treasury and FinCEN believe that 
few, if any, such businesses are likely to maintain a correspondent 
relationship with a bank licensed by Nauru. Treasury and FinCEN 
specifically request comments on the extent to which the prohibition 
contained in the proposed rule would affect such businesses.

VI. Executive Order 12866

    This final rule is not a ``significant regulatory action'' as 
defined in Executive Order 12866. Accordingly, a regulatory assessment 
is not required.

List of Subjects in 31 CFR Part 103

    Banks and banking, Brokers, Counter-money laundering, Counter-
terrorism, Currency, Foreign banking, Reporting and recordkeeping 
requirements.

    For the reasons set forth in the preamble, 31 CFR part 103 is 
proposed to be amended as follows:

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

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

    Authority: 12 U.S.C. 1786(q), 1818, 1829b and 1951-1959; 31 
U.S.C. 5311-5314 and 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 Sec.  
103.184 under the undesignated centerheading ``SPECIAL DUE DILIGENCE 
FOR CORRESPONDENT ACCOUNTS AND PRIVATE BANKING ACCOUNTS'' to read as 
follows:


Sec.  103.184  Special measures against Nauru.

    (a) Definitions. For purposes of this section:
    (1) Correspondent account has the same meaning as provided in Sec.  
103.175(d)(1)(ii) and (2).
    (2) Covered financial institution has the same meaning as provided 
in Sec.  103.175(f)(2) and also includes the following:
    (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 that is an open-end company (as defined 
in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-5) 
that is registered, or required to register, with the Securities and 
Exchange Commission pursuant to that Act.
    (3) Nauru financial institution means the following:
    (i) Any foreign bank, as that term is defined in Sec.  103.11(o), 
licensed by Nauru, but does not include the Central Bank of Nauru; and
    (ii) Any other person organized under the law of Nauru who conducts 
as a business one or more of the following activities or operations on 
behalf of customers:
    (A) Trading in money market instruments;
    (B) Trading in exchange, interest rate, and index instruments;
    (C) Trading in transferable securities; or
    (D) Trading in commodity futures trading.
    (b) Requirements for covered financial institutions--(1) 
Prohibition on correspondent accounts. A covered financial institution 
shall not establish, maintain, administer, or manage a correspondent 
account in the United States for, or on behalf of, a Nauru financial 
institution.
    (2) Termination of correspondent accounts. A covered financial 
institution shall terminate any correspondent account established, 
maintained, administered, or managed by that covered financial 
institution in the United States for a foreign bank upon actual 
knowledge that the correspondent account is being used by the foreign 
bank to provide banking services indirectly to a Nauru financial 
institution.
    (3) Reporting and recordkeeping not required. Nothing in this 
section shall require a covered financial institution to maintain any 
records, obtain any certification, or to report any information not 
otherwise required by applicable law or regulation.

    Dated: April 10, 2003.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
[FR Doc. 03-9410 Filed 4-16-03; 8:45 am]
BILLING CODE 4810-02-P