[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