[Federal Register Volume 69, Number 96 (Tuesday, May 18, 2004)]
[Proposed Rules]
[Pages 28098-28104]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11102]


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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA64


Financial Crimes Enforcement Network; Amendment to the Bank 
Secrecy Act Regulations--Imposition of a Special Measure Against 
Commercial Bank of Syria, Including Its Subsidiary, Syrian Lebanese 
Commercial Bank, as a Financial Institution of Primary Money Laundering 
Concern

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 Commercial Bank of Syria (CBS) as a financial 
institution of primary money laundering concern, pursuant to the 
authority contained in 31 U.S.C. 5318A of the Bank Secrecy Act.

DATES: Written comments on the notice of proposed rulemaking must be 
submitted on or before June 17, 2004.

ADDRESSES: You may submit comments, identified by RIN 1506-AA64, by 
either of the following methods:
     Federal e-rulemaking portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include RIN 1506-
AA64 in the subject line of the message.
     Mail: FinCEN, PO Box 39, Vienna, VA 22183. Include RIN 
1506-AA64 in the body of the text.
    Instructions: It is preferable for comments to be submitted by 
electronic mail because paper mail in the Washington, DC, area may be 
delayed. Please submit comments by one method only. All submissions 
received must include the agency name and the Regulatory Information 
Number (RIN) for this rulemaking. All comments received will be posted 
without change to http://www.fincen.gov, including any personal 
information provided. Comments may be inspected at FinCEN between 10 
a.m. and 4 p.m., in the FinCEN reading room in Washington, DC. Persons 
wishing to inspect the comments submitted must request an appointment 
by telephoning (202) 354-6400 (not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Office of Regulatory Programs, FinCEN, 
at (202) 354-6400; and Office of Chief Counsel, FinCEN, at (703) 905-
3590 (not toll-free numbers).

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 (USA PATRIOT Act) 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 (Secretary) to 
administer the BSA and its implementing regulations has been delegated 
to the Director of FinCEN.
    Section 311 of the USA Patriot Act (section 311) added section 
5318A to the BSA, granting the Secretary the authority to find that a 
foreign jurisdiction, institution, class of transactions, or type of 
account is of ``primary money laundering concern'' and 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 
agencies to consult before the Secretary may conclude that a 
jurisdiction, institution, or transaction is of primary money 
laundering concern. The statute also provides similar procedures, i.e., 
factors and consultation requirements, for selecting the imposition of 
specific special measures 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 and 
terrorist financing concerns most effectively. These options give the 
Secretary the authority to bring additional and useful 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 to consult 
with both the Secretary of State and the Attorney General.
    In addition to these consultations, the Secretary, when finding 
that a foreign financial institution is of primary money laundering 
concern, is required by statute to consider ``such information as the 
Secretary determines to be relevant, including the following 
potentially relevant factors'':
     The extent to which the financial institution is used to 
facilitate or promote money laundering in or through the jurisdiction;
     The extent to which the financial institution is used for 
legitimate

[[Page 28099]]

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.\1\ The Secretary's imposition of special measures follows 
procedures similar to those for designations, but carries with it 
additional consultations to be made and factors to consider. The 
statute requires the Secretary to consult with appropriate agencies and 
other interested parties \2\ and to consider the following specific 
factors:
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    \1\ 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 68 FR 18917 (April 17, 2003) 
(proposing to impose special measures against Nauru).
    \2\ Section 5318A(a)(4)(A) requires the Secretary to 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.'' 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.\3\
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    \3\ Classified information used in support of a section 311 
finding and measure(s) may be submitted by 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. CBS

    In this rulemaking, FinCEN proposes to impose the fifth special 
measure (31 U.S.C. 5318A(b)(5)) against CBS. The fifth special measure 
prohibits or conditions the opening or maintaining of correspondent or 
payable-through accounts. This special measure may be imposed only 
through the issuance of a regulation.
    CBS is based in Damascus, Syria, and maintains approximately 50 
branches and employs about 4,500 persons. All of the branches are 
located in Syria. CBS was established in Syria in 1967 as the single, 
government-owned bank specializing in servicing foreign trade and 
commercial banking, including foreign exchange transactions. CBS 
maintains correspondent accounts with banks in countries all over the 
world, including the United States. CBS has one subsidiary, Syrian 
Lebanese Commercial Bank, located in Beirut, Lebanon, of which CBS 
maintains approximately an 84% ownership interest. Syrian Lebanese 
Commercial Bank has two branches and two offices--its main branch in 
Beirut, a branch in Moussaitbeh, and representative offices in Aleppo 
and Damascus, Syria. Syrian Lebanese Commercial Bank also maintains 
correspondent accounts with a few banks in the United States. For 
purposes of this document and unless the context dictates otherwise, 
references to CBS include Syrian Lebanese Commercial Bank, and any 
other branch, office, or subsidiary of CBS.
    Syria has very limited money laundering controls in place. In 
September 2003, Syria passed Legislative Decree No. 59, creating an 
Anti-Money Laundering Commission and criminalizing money laundering for 
a small category of offenses. These specified offenses do not meet the 
minimum categories of offenses as provided in the Financial Action Task 
Force (FATF) 40 Recommendations on Money Laundering. The law also 
creates an Anti-Money Laundering Commission (referred to as the ``Anti-
Money Laundering Board'' in the law's implementing regulation) to 
investigate suspicious money laundering transactions, but the 
Commission is composed of both regulators and members of the banking 
community, thus automatically creating a conflict of interest. Further, 
the law continues to maintain strict bank secrecy, which can only be 
lifted through formal action by the Commission. The law and the 
implementing regulation also fail to provide an enforcement mechanism 
to ensure that anti-money laundering controls are implemented by the 
financial sector. On the whole, the law and the implementing regulation 
fail to meet the international standards established by the FATF 40 
Recommendations and thus do not create an effective anti-money 
laundering regime. Furthermore, Syria does not participate in any 
exchange of information with foreign nations or foreign financial 
institutions, severely hampering the ability to obtain information 
about transactions involving CBS. Finally, as a financial entity under 
the control of a designated state sponsor of terrorism, CBS provides 
cause for real concern about terrorist financing and money laundering 
activities.

II. Imposition of Special Measure Against CBS, Including Its 
Subsidiary, Syrian Lebanese Commercial Bank, as a Financial Institution 
of Primary Money Laundering Concern

A. Finding

    Based upon a review and analysis of relevant information, 
consultations with relevant 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 CBS 
is a financial institution of primary money laundering concern. FinCEN 
has reason to believe that CBS: (1) Has been used by terrorists and/or 
persons associated with terrorist organizations; and (2) has been used 
as a conduit for the laundering of proceeds generated from the illicit 
sale of Iraqi oil. In addition, CBS is licensed in Syria, a 
jurisdiction with very limited money laundering controls. A discussion 
of the section 311 factors relevant to this finding follows.
1. The Extent to Which CBS Has Been Used to Facilitate or Promote Money 
Laundering in or Through the Jurisdiction
    FinCEN has reason to believe, based upon a variety of sources, that 
CBS is used to facilitate or promote money laundering. First, the U.S. 
Government has information through classified

[[Page 28100]]

sources that CBS may have been used by terrorists and/or persons 
associated with terrorist organizations. Because the crime of money 
laundering includes the use of financial institutions to promote the 
carrying on of terrorist activity, the use of CBS by terrorists 
demonstrates that it is being used to promote money laundering.
    In addition, CBS has maintained accounts containing the proceeds 
from the illicit sale of Iraqi oil in violation of comprehensive U.N. 
sanctions. The U.S. Government has information that more than $1 
billion was illegally diverted by Saddam Hussein's regime from the 
U.N.'s Oil-for-Food program.\4\ Some of that money appears to have been 
used to purchase military weapons, which may now be in use against U.S. 
and other coalition troops in Iraq. The sale of Iraqi oil outside the 
U.N.'s Oil-for-Food Program, in violation of applicable U.N. sanctions, 
was overseen by the Iraqi State Oil Marketing Organization (SOMO). SOMO 
maintained at least two accounts at CBS through which proceeds from the 
illicit sale of Iraqi oil flowed. Further, the Government of Syria has 
not taken any steps to transfer the CBS accounts containing the 
proceeds generated from the illicit sale of Iraqi oil to the 
Development Fund for Iraq, as required under U.N. Security Council 
Resolution (UNSCR) 1483. UNSCR 1483 requires Member States in which 
there are funds or other financial assets of the previous Government of 
Iraq or its state bodies, corporations, or agencies, located outside 
Iraq, to freeze those assets and, unless they are the subject of prior 
judicial, administrative, or arbitral lien or judgment, to transfer 
them to the Development Fund of Iraq.
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    \4\ In 1995, the U.N. Security Council adopted Resolution 986, 
establishing the Oil-for-Food Program. The Program provided Iraq 
with an opportunity to sell oil to finance the purchase of 
medicines, health supplies, food, and other humanitarian goods, 
notwithstanding the U.N.-imposed sanctions then in effect with 
respect to Iraq. The first Iraqi oil under the Program was exported 
in December 1996 and the first shipments of food arrived in March 
1997.
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    Finally, numerous transactions that may be indicative of terrorist 
financing and money laundering have been observed transiting CBS. This 
financial activity includes several transactions through accounts at 
CBS that reference a reputed financier for Osama bin Laden. The 
observed activity also includes classic indicia of money laundering 
such as: Large deposits into U.S. financial institutions of 
sequentially-numbered monetary instruments that reference CBS; large 
and/or structured deposits of funds into bank accounts, followed 
immediately by the transfer of those funds to CBS; and a number of 
structured or otherwise suspicious wire transfers, totaling more than 
$1 million, transmitted through U.S. financial institutions to accounts 
at CBS over the past several years.
2. The Extent to Which CBS Is Used for Legitimate Business Purposes in 
the Jurisdiction
    Until very recently, CBS had been the only bank in Syria authorized 
to provide commercial banking services and to engage in foreign 
currency transactions. Consequently, a significant number of 
transactions through CBS are likely legitimate. Indeed, some U.S. 
financial institutions appear to have legitimate correspondent 
relationships with the Bank. However, given that CBS is subject to 
extremely limited anti-money laundering controls, and because it is 
owned and controlled by a government that sponsors terrorism,\5\ the 
extent of the Bank's legitimate activities is ultimately difficult to 
quantify. FinCEN specifically solicits comment on the impact of the 
proposed special measure upon legitimate transactions with CBS 
involving, for example, the U.S. Embassy, U.S. companies, United 
Nations agencies, and non-governmental and private voluntary 
organizations doing business in Syria, including the availability of 
alternative banking facilities for such legitimate transactions, and 
the need for an exception if suitable alternatives are not available.
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    \5\ Syria is designated as a state sponsor of terrorism, under 
section 6(j) of the Export Administration Act of 1979, 50 U.S.C. 
App. 2405. Section 321 of the Antiterrorism and Effective Death 
Penalty Act of 1996 (AEDPA), Pub. L. 104-132, makes it a criminal 
offense for U.S. persons, except as provided in regulations issued 
by the Secretary of the Treasury in consultation with the Secretary 
of State, knowingly to engage in a financial transaction with the 
government of any country designated as supporting international 
terrorism. For the purpose of implementing section 321 of AEDPA, 
regulations issued and administered by the Office of Foreign Assets 
Control (OFAC) of the U.S. Department of the Treasury effectively 
prohibit U.S. persons from engaging in financial transactions with 
the government of Syria that constitute unlicensed donations to U.S. 
persons or are such financial transactions that the U.S. person 
knows or has reasonable cause to believe pose a risk of furthering 
terrorist acts in the United States.
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    FinCEN has identified numerous instances where substantial amounts 
of illicit funds passed through CBS. Additionally, CBS continues to 
hold Iraq-related accounts that should have been transferred to the 
Development Fund for Iraq, as required by UNSCR 1483. Thus, any 
legitimate use of CBS is significantly outweighed by the apparent use 
of the Bank to promote or facilitate terrorist financing or money 
laundering.
3. The Extent to Which Such Action is Sufficient to Ensure, With 
Respect to Transactions Involving CBS, 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 believe that 
CBS is being used to promote or facilitate money laundering. At the 
moment, there are no protective measures that specifically target CBS. 
Thus, finding CBS to be a financial institution of primary money 
laundering concern and prohibiting the opening or maintaining of 
correspondent accounts for that institution, is a necessary step to 
ensure that CBS is not able to access the U.S. financial system to 
facilitate terrorist financing or money laundering, or to engage in any 
other criminal purpose.

B. Imposition of Special Measure

    As a result of the finding that CBS is a financial institution of 
primary money laundering concern, and based upon the additional 
consultations and the consideration of all 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 section 5318A(b)(5).\6\ That special measure authorizes 
the prohibition of the opening or maintaining of correspondent accounts 
\7\ 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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    \6\ In connection with this action, FinCEN consulted with staff 
of the Federal functional regulators, the Department of Justice, and 
the State Department.
    \7\ 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 CBS
    Although Syria has been designated by the United States as a state 
sponsor of terrorism, other countries have not made a similar 
designation. In addition, other countries have not taken an action 
similar to the one proposed in this rulemaking that would prohibit 
domestic financial institutions and agencies from opening or 
maintaining a correspondent account for or on behalf of CBS, which is 
owned and controlled by the Government of Syria. The U.S.

[[Page 28101]]

Government hopes that other countries will take similar action based on 
the findings contained in this rulemaking. In the meantime, lack of 
similar action by other countries makes it even more imperative that 
the fifth special measure be imposed in order to prevent access by CBS 
to the U.S. financial system.
2. Whether the Imposition of the Fifth Special Measure Would Create a 
Significant Competitive Disadvantage, Including Any Undue Cost or 
Burden Associated With Compliance, for Financial Institutions Organized 
or Licensed in the United States
    The fifth special measure sought to be imposed by this rulemaking 
would prohibit covered financial institutions from opening or 
maintaining correspondent accounts for, or on behalf of, CBS. As a 
corollary to this measure, covered financial institutions also would be 
required to apply special due diligence to all of their correspondent 
accounts to ensure that no such account is being used indirectly to 
provide services to CBS. The burden associated with these requirements 
is not expected to be significant, given that only a few U.S. banks 
currently maintain correspondent accounts for CBS. In addition, all 
U.S. persons (including financial institutions) currently apply some 
degree of due diligence to all transactions or accounts involving the 
government of Syria, as a means of complying with the sanctions 
currently imposed against Syria. As explained in more detail in the 
section-by-section analysis below, financial institutions should be 
able to adapt their current screening procedures 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 
Would Have a Significant Adverse Systemic Impact on the International 
Payment, Clearance, and Settlement System, or on Legitimate Business 
Activities of CBS
    This rulemaking targets CBS specifically; it does not target a 
class of financial transactions (such as wire transfers) or a 
particular jurisdiction. CBS 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 CBS will not 
have a significant adverse systemic impact on the international 
payment, clearance, and settlement system. As until recently CBS was 
the only financial institution in Syria that could conduct commercial 
and foreign exchange transactions, the imposition of this special 
measure likely will affect some legitimate business activities. Two 
private banks have recently been established that are permitted to 
conduct foreign exchange and foreign currency transactions. However, 
the Government of Syria is still developing implementing regulations to 
permit these banks to conduct the full range of foreign transactions. 
The imposition of this measure may in fact act as a catalyst in the 
process of opening the Syrian banking sector. On balance, FinCEN does 
not believe that imposition of the fifth special measure will place an 
undue burden on legitimate business transactions in light of the 
reasons for imposing this measure.
4. The Effect of the Proposed Action on United States 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, making it more difficult for 
criminals to access the substantial resources of the U.S. financial 
system. In addition, the imposition of the fifth special measure 
against CBS would complement the U.S. Government's overall foreign 
policy strategy of enhancing national security through comprehensive 
economic and political sanctions against Syria, as demonstrated by the 
recent enactment of the Syria Accountability Act.\8\
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    \8\ On December 12, 2003, the President signed into law the 
Syria Accountability and Lebanese Sovereignty Restoration Act of 
2003 (the Syria Accountability Act), Pub. L. 108-175. Section 5 
requires the President to impose a number of different sanctions on 
Syria until such time that the President certifies to Congress that 
Syria, among other things, no longer provides support for 
international terrorist groups. The President may refrain from 
imposing any sanction specified in the Syria Accountability Act if 
he determines that it is in the national security interest of the 
United States to do so and submits to the appropriate congressional 
committee a report containing the reasons for the determination.
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    Therefore, after conducting the required consultations and weighing 
the relevant factors, FinCEN has determined that reasonable grounds 
exists for concluding that CBS 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, CBS. 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 CBS. At a minimum, that special 
due diligence must include two elements. First, a covered financial 
institution must notify its correspondent account holders that they may 
not provide CBS 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 CBS, 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, additional due diligence measures it should adopt to 
guard against the indirect use of its correspondent accounts by CBS, 
based on risk factors such as the type of services it offers and 
geographic locations of its correspondents.

A. 103.188(a)--Definitions

1. Correspondent Account
    Section 103.188(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 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 and 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)

[[Page 28102]]

of the USA Patriot Act \9\ except that the term is being expanded to 
cover such accounts maintained by mutual funds and by futures 
commission merchants and introducing brokers.
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    \9\ See 67 FR 60562 (September 26, 2002), codified at 31 CFR 
103.175(d)(1).
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2. Covered Financial Institution
    Section 103.188(a)(2) of the proposed rule defines covered 
financial institution to mean all of the following: Any insured bank 
(as defined in section 3(h) of the Federal Deposit Insurance Act (12 
U.S.C. 1813(h)); a commercial bank or trust company; a private banker; 
an agency or branch of a foreign bank in the United States; a credit 
union; a thrift institution; a corporation acting under section 25A of 
the Federal Reserve Act (12 U.S.C. 611 et seq.); a broker or dealer 
registered or required to register with the SEC under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.); a futures commission 
merchant or 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. CBS
    Section 103.188(a)(3) of the proposed rule defines CBS to include 
all headquarters, branches, and offices of CBS operating in Syria or in 
any other jurisdiction. All subsidiaries of CBS, including Syrian 
Lebanese Commercial Bank and its branches, are included in the 
definition, although FinCEN understands that CBS currently only has one 
subsidiary, Syrian Lebanese Commercial Bank. FinCEN will provide 
updated information as it becomes available; however, the 
responsibility for determining whether a customer is a subsidiary of 
CBS ultimately rests with the covered financial institution. For 
purposes of complying with the proposed rule's prohibition on the 
opening or maintaining of correspondent accounts for or on behalf of 
CBS or any of its subsidiaries, 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 or other 
fraud or loss based on misidentification of a person's status.

B. 103.188(b)--Requirements for Covered Financial Institutions

1. Prohibition on Direct Use of Correspondent Accounts
    Section 103.188(b)(1) of the proposed rule prohibits all covered 
financial institutions from establishing, maintaining, administering, 
or managing a correspondent or payable-through account in the United 
States for, or on behalf of, CBS. 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, 
CBS.
2. Special Due Diligence of Correspondent Accounts To Prohibit Indirect 
Use
    As a corollary to the prohibition on the opening or maintaining of 
correspondent accounts directly for CBS, section 103.188(b)(2) requires 
a covered financial institution to apply special due diligence to its 
correspondent accounts \10\ that is reasonably designed to guard 
against their indirect use by CBS. At a minimum, that special due 
diligence must include notifying correspondent account holders that 
they may not provide CBS 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 account holders:
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    \10\ Again, 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.

    Notice: Pursuant to U.S. regulations issued under section 311 of 
the USA PATRIOT Act, 31 CFR 103.188, please be informed that you are 
prohibited from providing Commercial Bank of Syria or any of its 
subsidiaries (including Syrian Lebanese Commercial Bank) with access 
to the correspondent account(s) that we maintain for or on behalf of 
your institution. Any failure to comply with this prohibition may 
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result in the termination of the affected correspondent account.

    The purpose of the notice requirement is to help ensure cooperation 
from correspondent account holders in denying CBS access to the U.S. 
financial system, as well as to increase awareness within the 
international financial community of the risks and deficiencies of CBS. 
However, FinCEN does not require or expect a covered financial 
institution to obtain a certification from its correspondent account 
holders 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 CBS 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 account holders. FinCEN specifically solicits 
comments on the appropriate form and scope 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 CBS, 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 CBS as the originator's or beneficiary's financial 
institution, or otherwise referenced CBS. An appropriate screening 
mechanism could be the mechanism used by a covered financial 
institution to comply with sanctions programs imposed under other 
federal law. 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 CBS.
    Notifying its correspondent account holders and taking reasonable 
steps to identify any indirect use of its correspondent accounts by CBS 
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, additional due diligence measures it should 
implement to guard against the indirect use of its correspondents 
accounts by CBS, based on risk factors such as the type of services it 
offers and the geographic locations of its correspondent account 
holders.
    A covered financial institution that obtains knowledge that a 
correspondent account is being used by a foreign bank to provide 
indirect access to CBS must take all appropriate steps to block such

[[Page 28103]]

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 no longer be used for 
impermissible purposes, the covered financial institution must 
terminate the account within a commercially reasonable time. 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 CBS. FinCEN specifically 
solicits comment on the requirement under the proposed rule that a 
covered financial institution block indirect access to CBS, once such 
indirect access is identified.
3. Reporting Not Required
    Section 103.188(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 law or regulation. A 
covered financial institution must, however, document its compliance 
with the requirement that it notify its correspondent account holders 
that they may not provide CBS 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 CBS, and specifically invites comments on the following matters:
    1. The appropriate form and scope of the notice to correspondent 
account holders 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 CBS;
    3. The appropriate steps a covered financial institution should 
take once it identifies an indirect use of one of its correspondent 
accounts by CBS; and
    4. The impact of the proposed special measure upon legitimate 
transactions with CBS involving, for example, the U.S. Embassy, U.S. 
companies, multilateral organizations, and non-governmental and private 
voluntary organizations doing business in Syria, the availability of 
alternative banking facilities, and the need for an exception if 
suitable alternatives are not available.

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 CBS currently maintains only a handful of 
correspondent accounts in the United States, and that those accounts 
are maintained at very large banks. 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, currently exercise some degree 
of due diligence in order to comply with U.S. sanctions programs, 
including sanctions against Syria. Thus, the special due diligence that 
would be required by this rulemaking--i.e., the one-time transmittal of 
notice to correspondent account holders--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 [email protected]), 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 June 
17, 2004. 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 103.188 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 
103.188(b)(2)(i) and 31 CFR 103.188(b)(3)(i). The disclosure 
requirement in 31 CFR 103.188(b)(2)(i) is intended to ensure 
cooperation from correspondent account holders in denying access to the 
U.S. financial system, as well as to increase awareness within the 
international financial community of the risks and deficiencies of CBS. 
The information required to be maintained by 31 CFR 103.188(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 103.188. 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.
    Estimated 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 1 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

[[Page 28104]]

Code of Federal Regulations is proposed to be amended as follows:

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

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

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

    2. Subpart I of part 103 is proposed to be amended by adding new 
Sec.  103.188 to read as follows:


Sec.  103.188  Special measures against Commercial Bank of Syria.

    (a) Definitions. For purposes of this section:
    (1) Commercial Bank of Syria means any headquarters, branch, 
office, or subsidiary of Commercial Bank of Syria operating in Syria or 
in any other jurisdiction, including Syrian Lebanese Commercial Bank.
    (2) Correspondent account has the same meaning as provided in Sec.  
103.175(d)(1)(ii).
    (3) 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 (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 is required to register, with the 
Securities and Exchange Commission under section 8 of the Investment 
Company Act (15 U.S.C. 80a-8).
    (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, Commercial Bank of Syria.
    (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 Commercial Bank of Syria. At a 
minimum, that special due diligence must include:
    (A) Notifying correspondent account holders that they may not 
provide Commercial Bank of Syria 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 Commercial Bank of Syria, 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, additional due diligence measures 
it should adopt to guard against the indirect use of its correspondent 
accounts by Commercial Bank of Syria.
    (iii) A covered financial institution that obtains knowledge that a 
correspondent account is being used by the foreign bank to provide 
indirect access to Commercial Bank of Syria, 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: May 11, 2004.
William J. Fox,
Director, Financial Crimes Enforcement Network.
[FR Doc. 04-11102 Filed 5-17-04; 8:45 am]
BILLING CODE 4810-02-P