[Federal Register Volume 69, Number 163 (Tuesday, August 24, 2004)]
[Proposed Rules]
[Pages 51979-51986]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-19267]


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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA65


Financial Crimes Enforcement Network; Amendment to the Bank 
Secrecy Act Regulations--Imposition of Special Measure Against First 
Merchant Bank OSH Ltd, Including Its Subsidiaries, FMB Finance Ltd, 
First Merchant International Inc, First Merchant Finance Ltd, and First 
Merchant Trust Ltd, 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 First Merchant Bank OSH Ltd 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 September 23, 2004.

ADDRESSES: You may submit comments, identified by RIN 1506-AA65, by any 
of the following methods:
     Federal e-rulemaking portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regcomments@fincen.treas.gov. Include RIN 1506-
AA65 in the subject line of the message.
     Mail: FinCEN, P.O. Box 39, Vienna, VA 22183. Include RIN 
1506-AA65 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 proposed 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 or 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), Pub. L. 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, upon finding 
that reasonable grounds exist for concluding that a foreign 
jurisdiction, institution, class of transactions, or type of account is 
of ``primary money laundering concern,'' to require domestic financial 
institutions and financial agencies to take certain ``special 
measures'' against the primary money laundering concern. Section 311 
identifies factors for the Secretary to consider and Federal agencies 
to consult before the Secretary may find that reasonable grounds exist 
for concluding 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.

[[Page 51980]]

    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; monitor more effectively the 
respective jurisdictions, institutions, transactions, and accounts; 
and/or 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 section 311 to consider ``such information as 
the Secretary determines to be relevant, including the following 
potentially relevant factors:'
     The extent to which such financial institution is used to 
facilitate or promote money laundering in or through the jurisdiction;
     The extent to which such financial institution is used for 
legitimate business purposes in the jurisdiction; and
     The extent to which such action 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 reasonable grounds exist for 
concluding 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\ In 
the imposition of special measures, the Secretary follows procedures 
similar to those for finding a foreign financial institution to be of 
primary money laundering concern, but performs additional consultations 
and considers additional factors. Section 311 requires the Secretary to 
consult with other appropriate Federal agencies and 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 
System, 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 upon the opening or 
maintaining of a correspondent account by any domestic financial 
institution or domestic financial agency for the foreign financial 
institution of primary money laundering concern.
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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 
designation 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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A. ``Turkish Republic of Northern Cyprus''

    In this proposed rulemaking, FinCEN proposes to impose the fifth 
special measure (31 U.S.C. 5318A(b)(5)) against First Merchant Bank OSH 
Ltd (First Merchant Bank or the Bank). The fifth special measure 
prohibits or imposes conditions upon the opening or maintaining of 
correspondent or payable-through accounts for the foreign financial 
institution of primary money laundering concern. This special measure 
may be imposed only through the issuance of a regulation.
    Cyprus was divided in 1974 when a coup d'etat directed from Greece 
induced the Turkish military to intervene. Since then, the southern 
part of the country has been under the control of the Government of the 
Republic of Cyprus. The northern part is controlled by a Turkish 
Cypriot administration that in 1983 proclaimed itself the ``Turkish 
Republic of Northern Cyprus'' (``TRNC'').\4\ Turkey is the only country 
that recognizes the ``TRNC.''
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    \4\ Because the United States does not recognize the ``Turkish 
Republic of Northern Cyprus,'' all references to the country or 
government in this proposed rulemaking are placed within quotation 
marks.
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    The ``TRNC'' has a sizeable offshore sector that is not subject to 
effective anti-money laundering regulation. The offshore sector 
consists of 33 banks and approximately 54 international business 
companies. Under Turkish Cypriot law, the offshore banks may not 
conduct business with ``TRNC'' residents and may not deal in cash. The 
offshore entities are audited by the Turkish Cypriot ``Central Bank'' 
and are required to submit a yearly report on their activities. 
However, the ``Central Bank'' has no regulatory authority over the 
offshore banks and can neither grant nor revoke licenses. Instead, the 
Turkish Cypriot ``Ministry of the Interior'' performs this function, 
which leaves the process open to politicization and possible 
corruption. Although a recently proposed law would have restricted the 
granting of new bank licenses to only those banks already having 
licensees in an OECD country, the law never passed.
    The Turkish Cypriot anti-money laundering law became effective in 
1999. Although the law, on paper, is a significant improvement over the 
money laundering controls previously in place, the Government of the 
``TRNC'' has received few suspicious activity reports from financial 
institutions and has been lax in enforcing the law.\5\ The fact that 
the ``TRNC'' is recognized only by Turkey prevents ``TRNC'' officials 
from receiving training or funding from international organizations 
with experience in combating money laundering.
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    \5\ See U.S. Department of State, 2003 International Narcotics 
Control Strategy Report, issued March 1, 2004 (INCSR).
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    There continues to be evidence that narcotics trade with Turkey and 
Britain and money laundering are conducted in or through the ``TRNC.'' 
\6\ Criminals reportedly use casinos operating in the

[[Page 51981]]

``TRNC'' and Turkish Cypriot banks licensed to operate offshore to 
launder money from their illegal activities. The jurisdiction's 21 
primarily Turkish-mainland owned casinos are essentially unregulated. 
``TRNC'' officials believe that much of the currency generated by these 
casinos is transported directly to Turkey without entering the ``TRNC'' 
banking system.\7\ And, as noted above, the licensing process and 
supervision of offshore banks by the Government of the ``TRNC'' is not 
rigorous. Although Turkish Cypriot law prohibits individuals entering 
or leaving the ``TRNC'' from transporting more than the equivalent of 
$10,000 in currency, Central Bank officials note that this law is 
difficult to enforce, given the large volume of travelers between 
Turkey and the ``TRNC'' and the growing number of individuals crossing 
the U.N.-patrolled buffer zone since travel restrictions were relaxed 
between north and south Cyprus in 2003.\8\
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    \6\ INCSR, supra note 11.
    \7\ Id.
    \8\ Id.
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B. First Merchant Bank OSH Ltd

    First Merchant Bank operates out of offices in Lefkosa/Nicosia, 
``TRNC,'' and has 21 employees. First Merchant Bank was licensed in the 
``TRNC'' in 1993 as an offshore bank. It is a privately owned 
commercial bank specializing in the provision of commercial and 
investment banking services to individual and corporate offshore 
customers. On its Web site, the Bank repeatedly advertises the 
``private'' and ``discreet'' nature of its services, stressing that 
customers receive the ``highest confidentiality'' from and ``a close 
relationship'' with the Bank.\9\ First Merchant Bank maintains 
correspondent accounts with banks in countries all over the world, 
including several U.S. and foreign banks located in New York City.\10\ 
According to published reports, Dr. Hakki Yaman Namli is President, 
Chairman, and General Manager of First Merchant Bank.\11\ First 
Merchant Bank is owned by Standard Finance Ltd. (Ireland) and private 
shareholders (98% and 2%, respectively).\12\ Standard Finance Ltd., in 
turn, is owned by Provincial & Allied Funding Corp. (Bahamas) and 
Millvale Holdings Inc. (British Virgin Islands). As stated on its Web 
site, First Merchant Bank has four wholly owned subsidiaries: FMB 
Finance Ltd (British Virgin Islands), First Merchant International Inc 
(Bahamas), First Merchant Finance Ltd (Ireland), and First Merchant 
Trust Ltd (Ireland). For the purposes of this document, unless the 
context dictates otherwise, references to First Merchant Bank include 
FMB Finance Ltd, First Merchant International Inc, First Merchant 
Finance Ltd, and First Merchant Trust Ltd, and any other branch, 
office, or subsidiary of First Merchant Bank operating in the ``TRNC'' 
or in any other jurisdiction.
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    \9\ See http://www.firstmerchantbank.com.
    \10\ The Bankers' Almanac, Reed Business Information Ltd (2003).
    \11\ Id.
    \12\ Id.
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II. Imposition of Special Measure Against First Merchant Bank, 
Including Its Subsidiaries, FMB Finance Ltd, First Merchant 
International Inc, First Merchant Finance Ltd, and First Merchant Trust 
Ltd, as a Financial Institution of Primary Money Laundering Concern

A. Finding

    Based upon a review and analysis of relevant information, 
consultations with relevant Federal agencies and departments, and after 
consideration of the factors enumerated in section 311, the Secretary, 
through his delegate, the Director of FinCEN, has found that reasonable 
grounds exist for concluding that First Merchant Bank is a financial 
institution of primary money laundering concern. FinCEN has found First 
Merchant Bank to be of primary money laundering concern based on a 
number of factors, including: (1) It is licensed as an offshore bank in 
the ``TRNC,'' a jurisdiction with inadequate anti-money laundering 
controls, particularly those applicable to its offshore sector; (2) it 
is involved in the marketing and sale of fraudulent financial products 
and services; (3) it has been used as a conduit for the laundering of 
fraudulently obtained funds; and (4) the individuals who own, control, 
and operate First Merchant Bank have links with organized crime and 
apparently have used First Merchant Bank to launder criminal proceeds. 
A discussion of the section 311 factors relevant to this finding 
follows.
1. The Extent to Which First Merchant Bank Has Been Used To Facilitate 
or Promote Money Laundering in or Through the Jurisdiction
    FinCEN has determined, based on a variety of sources, that First 
Merchant Bank is used to facilitate or promote money laundering in or 
through the ``TRNC.'' Indeed, some of the money laundering occurring at 
First Merchant Bank appears to involve the proceeds of First Merchant 
Bank's own fraudulent activity, as further described below. In 
addition, the proceeds of alleged illicit activity have been 
transferred to or through accounts held by First Merchant Bank at U.S. 
financial institutions.
    In January 2003, a Federal grand jury sitting in the Southern 
District of New York indicted First Merchant Bank's President, 
Chairman, and General Manager, Dr. Hakki Yaman Namli, as a co-
conspirator with an associate, Ralph Jarson,\13\ in a scheme to market 
``credit enhancement'' products, which consisted of deceptive bank 
documents showing that a customer had assets that did not exist, and to 
sell worthless ``credit facilities'' to investors.\14\ Allegedly, the 
conspirators worked with First Merchant Bank to produce and market the 
deceptive bank documents and worthless credit facilities. Because Dr. 
Hakki Yaman Namli became a fugitive from justice he was not tried on 
the indictment; however, his associate, Ralph Jarson, was convicted on 
six felony counts, including one count of conspiring with Dr. Hakki 
Yaman Namli to engage in wire fraud, and five counts of committing wire 
fraud, on October 30, 2003.
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    \13\ Jarson operated through his company Concorde Wyvern 
Atlantic, a/k/a Wyvern Anstalt, located in London and registered in 
Liechtenstein.
    \14\ Indictment S1 02 Cr. 679 (MGC); Southern District of New 
York, United States of America, versus Ralph Jarson and Hakki Yaman 
Namli.
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    The indictment on which Ralph Jarson was tried describes two 
different schemes perpetrated by Ralph Jarson, Dr. Hakki Yaman Namli, 
and First Merchant Bank. First, Ralph Jarson and Dr. Hakki Yaman Namli 
negotiated the sale of a fraudulent ``special account statement'' 
issued by First Merchant Bank to an FBI undercover agent posing as a 
representative of a brokerage firm for a fee of $2 million. The 
``special account statement'' showed that the brokerage firm had $20 
million in immediately available assets when, in fact, no assets 
existed. Second, in exchange for $1 million, First Merchant Bank issued 
a worthless letter of credit with a face value of $100 million to an 
investor for the purchase of discounted medium term bank notes that the 
investor later discovered were non-existent.
    A review of records obtained from a number of financial 
institutions in the U.S. shows a pattern of fraudulent conduct similar 
to that described in the indictment by Dr. Hakki Yaman Namli and First 
Merchant Bank that began as early as 1997 and continued through at 
least the end of 2002. Several different U.S. banks were approached by 
First Merchant Bank customers attempting to use fraudulent letters of 
credit or fraudulent loan guarantees issued or provided by First 
Merchant Bank as

[[Page 51982]]

collateral to obtain funds from the U.S. banks.
    In addition, it appears that First Merchant Bank has used its 
correspondent accounts with banks in the U.S. as conduits for the 
transfer of fraudulently obtained funds. In one case, $4 million in 
proceeds of a ``prime bank'' fraud \15\ were transferred through one of 
First Merchant Bank's correspondent accounts in the U.S. to the 
perpetrator's account in the ``TRNC.'' In another case, a former 
officer of a third bank wired $700,000 to the same correspondent 
account for the benefit of First Merchant Bank. The third bank 
suspected that the funds derived from the former officer's misuse of 
position or self-dealing while employed at the bank.
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    \15\ The persons promoting these fraudulent schemes often claim 
that an innocent investor's funds will be used to purchase and trade 
financial instruments issued by well-regarded and financially sound 
institutions (``prime banks'') on clandestine overseas markets to 
generate huge returns in which the investor will share. However, 
neither the instruments, nor the markets on which they allegedly 
trade, exist.
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    Domestic and foreign newspapers and magazines report that First 
Merchant Bank has been used for illicit transactions since its founding 
in 1993. Apparently, First Merchant Bank was established, at least in 
part, to facilitate the movement of funds between organized crime rings 
and corrupt politicians. The earliest indicators of illicit activity on 
the part of First Merchant Bank or its principals involved the original 
shareholders or partners of the Bank. One of the original partners of 
First Merchant Bank is reported to be a former KGB employee identified 
as Vladimir Kobarel, who allegedly involved First Merchant Bank in 
transferring underground money to Russian banks. Another original 
partner, Tarik Umit, was a former Turkish National Intelligence 
Organization (MIT) member who was believed killed in connection with a 
well-known Turkish investigation into links between the Turkish mafia, 
the MIT, and right wing politicians (the Susurluk scandal).\16\ First 
Merchant Bank, Tarik Umit, and Dr. Hakki Yaman Namli are alleged to 
have been involved with the laundering of $450 million in narcotics 
proceeds for the ``Susurluk gang.''
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    \16\ The Susurluk scandal began with an automobile accident in 
Susurluk, Turkey, on November 3, 1996. Four people occupied the 
automobile: The deputy police chief of Istanbul; an alleged 
``extreme nationalist hit man'' previously convicted of heroin 
trafficking and wanted for terrorism; the hit man's girlfriend, who 
couriered drugs and had been the mistress of several prominent 
members of the Turkish mafia; and a member of the Turkish 
Parliament, whose private militia had helped the army fight Kurdish 
militants. The member of Parliament was the only survivor of the 
crash and claimed to have lost his memory. The trunk of the car was 
full of weapons. The incident received national notoriety and served 
as the basis for Parliamentary investigations into links among 
politicians, the arms trade, and organized crime.
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2. The Extent to Which First Merchant Bank Is Used for Legitimate 
Business Purposes in the Jurisdiction
    Because First Merchant Bank is located in the ``TRNC,'' which is 
not recognized by the United States and has weak anti-money laundering 
laws, and is an offshore bank subject to limited government oversight, 
the extent of First Merchant Bank's legitimate activities is ultimately 
difficult to quantify. FinCEN has identified several instances in which 
First Merchant Bank and its Chairman have engaged in fraudulent 
activity and money laundering and in which illicit funds have passed 
through First Merchant Bank or one of its subsidiaries. Considering 
this evidence and the lack of evidence showing that the Bank is used 
for legitimate business purposes, FinCEN believes that First Merchant 
Bank is rarely, if ever, used for legitimate business transactions and 
any legitimate use of First Merchant Bank and its subsidiaries is 
significantly outweighed by their use to promote or facilitate money 
laundering. Nevertheless, FinCEN specifically solicits comment on the 
impact of the proposed special measure upon the any legitimate 
transactions conducted with First Merchant Bank involving, for example, 
United States businesses, United Nations agencies, and non-governmental 
and private voluntary organizations doing business in or operating in 
the ``TRNC.''
3. The Extent to Which Such Action Is Sufficient To Ensure, With 
Respect to Transactions Involving First Merchant Bank, That the 
Purposes of the BSA Continue To Be Fulfilled, and To Guard Against 
International Money Laundering and Other Financial Crimes
    As detailed above, FinCEN has reasonable grounds to conclude that 
First Merchant Bank is being used to promote or facilitate money 
laundering, including the transmission of fraudulent bank instruments 
through the U.S. financial system and the international laundering of 
the proceeds of fraudulent activity. Currently, there are no protective 
measures that specifically target First Merchant Bank or otherwise 
serve to notify U.S. and foreign financial institutions of the money 
laundering risks associated with First Merchant Bank. Thus, finding 
First Merchant Bank 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 First Merchant Bank is not able to access the U.S. 
financial system to facilitate money laundering or any other criminal 
activity. The finding of primary money laundering concern and the 
imposition of the special measure also bring the Bank's criminal 
conduct to the attention of the international financial community and 
hopefully further limit the Bank's ability to conduct transactions.

B. Imposition of Special Measure

    As a result of the finding that First Merchant Bank is a financial 
institution of primary money laundering concern, and based upon 
additional consultations with certain Federal agencies and departments 
and consideration of additional relevant factors, the Secretary, 
through his delegate, the Director of FinCEN, proposes imposition of 
the special measure authorized by 31 U.S.C. 5318A(b)(5).\17\ That 
special measure authorizes the prohibition of the opening or 
maintaining of correspondent or payable-through accounts \18\ by any 
domestic financial institution or domestic financial agency for, or on 
behalf of, a foreign financial institution found to be of primary money 
laundering concern. A discussion of the additional section 311 factors 
relevant to the imposition of this particular special measure follows.
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    \17\ In connection with this action, FinCEN consulted with the 
Federal functional regulators, the Department of Justice, and the 
Department of State.
    \18\ 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 First Merchant Bank
    Other countries have not taken any action similar to the one 
proposed in this proposed rulemaking that would prohibit domestic 
financial institutions and domestic financial agencies from opening or 
maintaining a correspondent account for or on behalf of First Merchant 
Bank. The United States hopes that other countries will take similar 
action based on the findings contained in this proposed rulemaking. In 
the meantime, lack of similar action by other countries makes it even 
more imperative that the fifth special measure be imposed to prevent 
access by First Merchant Bank to the U.S. financial system.

[[Page 51983]]

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 proposed 
rulemaking would prohibit covered financial institutions from opening 
or maintaining correspondent accounts for, or on behalf of, First 
Merchant Bank. 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 First Merchant Bank. The 
burden associated with these requirements is not expected to be 
significant, given that only a few domestic banks currently maintain 
correspondent accounts for First Merchant Bank. In addition, all U.S. 
financial institutions currently apply some degree of due diligence to 
the transactions or accounts subject to sanctions administered by the 
Office of Foreign Assets Control (OFAC) of the Department of the 
Treasury. As explained in more detail in the section-by-section 
analysis below, financial institutions should be able to adapt their 
current screening procedures for OFAC sanctions to comply with this 
special measure. Thus, the special due diligence that would be required 
by this proposed rulemaking is not expected to impose a significant 
additional burden upon U.S. financial institutions.
3. The Extent to Which the Proposed Action or Timing of the Action Will 
Have a Significant Adverse Systemic Impact on the International 
Payment, Clearance, and Settlement System, or on Legitimate Business 
Activities of the Bank
    This proposed rulemaking targets First Merchant Bank specifically; 
it does not target a class of financial transactions (such as wire 
transfers) or a particular jurisdiction. First Merchant Bank 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. Moreover, as an offshore bank, it is prohibited from offering 
banking services to the residents of its home jurisdiction. Thus, the 
imposition of the fifth special measure against First Merchant Bank 
will not have a significant adverse systemic impact on the 
international payment, clearance, and settlement system. In addition, 
as discussed above, FinCEN believes that First Merchant Bank is rarely, 
if ever, used for legitimate business transactions and any legitimate 
use of First Merchant Bank and its subsidiaries is significantly 
outweighed by their use to promote or facilitate money laundering.
4. The Effect of the Proposed Action on the 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 participate in 
other financial crime enhances national security, by 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 First Merchant Bank would complement the U.S. 
Government's overall foreign policy strategy of making the entry into 
the U.S. financial system more difficult for high-risk financial 
institutions located in jurisdictions with lax anti-money laundering 
controls.
    Therefore, after conducting the required consultations and weighing 
the relevant factors, FinCEN has determined that reasonable grounds 
exist for concluding that First Merchant Bank 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, First 
Merchant Bank. 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 First 
Merchant Bank. 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 First Merchant 
Bank 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 First Merchant Bank, to the extent that such indirect use 
can be determined from transactional records maintained by the covered 
financial institution in the normal course of business. A covered 
financial institution must take a risk-based approach when deciding 
what, if any, other due diligence measures it should adopt to guard 
against the indirect use of its correspondent accounts by First 
Merchant Bank, based on risk factors such as the type of services it 
offers and geographic locations of its correspondents.

A. 103.189(a)--Definitions

1. Correspondent Account
    Section 103.189(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, introducing brokers, and investment companies that are open-
end companies (mutual funds), a correspondent account would include any 
account that permits the foreign bank to engage in (1) trading in 
securities and commodity futures or options, (2) funds transfers, or 
(3) other types of financial transactions.
    FinCEN is using the same definition for purposes of the proposed 
rule as that established in the final rule implementing sections 313 
and 319(b) of the USA Patriot Act,\19\ except that the term is being 
expanded to cover such accounts maintained by mutual funds, futures 
commission merchants, and introducing brokers.
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    \19\ See 67 FR 60562 (September 26, 2002), codified at 31 CFR 
103.175(d)(1).
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2. Covered Financial Institution
    Section 103.189(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 an introducing broker registered, or required to register, 
with

[[Page 51984]]

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. First Merchant Bank
    Section 103.189(a)(3) of the proposed rule defines First Merchant 
Bank to include all subsidiaries, branches, and offices of First 
Merchant Bank operating in the ``TRNC'' or in any other jurisdiction. 
FMB Finance Ltd. (British Virgin Islands), First Merchant International 
Inc. (Bahamas), First Merchant Finance Ltd. (Ireland), and First 
Merchant Trust Ltd. (Ireland), and their branches, are included in the 
definition, although FinCEN understands that First Merchant Bank 
currently has only the four subsidiaries mentioned here. FinCEN will 
provide information regarding the existence or establishment of any 
other subsidiaries as it becomes available; however, covered financial 
institutions should take commercially reasonable measures to determine 
whether a customer is a subsidiary of First Merchant Bank.

B. 103.189(b)--Requirements for Covered Financial Institutions

    For purposes of complying with the proposed rule's prohibition on 
the opening or maintaining of correspondent accounts for, or on behalf 
of, First Merchant Bank, 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.
1. Prohibition on Direct Use of Correspondent Accounts
    Section 103.189(b)(1) of the proposed rule prohibits all covered 
financial institutions from establishing, maintaining, administering, 
or managing a correspondent account in the United States for, or on 
behalf of, First Merchant Bank. 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, 
First Merchant Bank.
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 First Merchant Bank, section 
103.189(b)(2) requires a covered financial institution to apply special 
due diligence to its correspondent accounts \20\ that is reasonably 
designed to guard against their indirect use by First Merchant Bank. At 
a minimum, that special due diligence must include notifying 
correspondent account holders that they may not provide First Merchant 
Bank 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:
---------------------------------------------------------------------------

    \20\ 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 103.189, we are prohibited from 
establishing, maintaining, administering, or managing a 
correspondent account for, or on behalf of, First Merchant Bank or 
any of its subsidiaries (including FMB Finance Ltd. First Merchant 
International Inc. First Merchant Finance Ltd. and First Merchant 
Trust Ltd.). The regulations also require us to notify you that you 
may not provide First Merchant Bank or any of its subsidiaries with 
access to the correspondent account you hold at our financial 
institution. If we become aware that First Merchant Bank or any of 
its subsidiaries is indirectly using the correspondent account you 
hold at our financial institution, we will be required to take 
appropriate steps to block such access, including by terminating 
---------------------------------------------------------------------------
your account.

    The purpose of the notice requirement is to help ensure cooperation 
from correspondent account holders in denying First Merchant Bank 
access to the U.S. financial system, as well as to increase awareness 
within the international financial community of the risks and 
deficiencies of First Merchant Bank. 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 First Merchant Bank 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, 
scope, and timing of the notice that would be required under the rule.
    A covered financial institution also would be required under this 
rulemaking to take reasonable steps to identify any indirect use of its 
correspondent accounts by First Merchant Bank, 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 First Merchant Bank as the originator's 
or beneficiary's financial institution, or otherwise referenced First 
Merchant Bank. An appropriate screening mechanism could be the 
mechanism used by a covered financial institution to comply with 
sanctions programs administered by OFAC. FinCEN specifically solicits 
comments on the requirement under the proposed rule that a covered 
financial institution take reasonable steps to screen its correspondent 
accounts to identify any indirect use of such accounts by First 
Merchant Bank.
    Notifying its correspondent account holders and taking reasonable 
steps to identify any indirect use of its correspondent accounts by 
First Merchant Bank 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 
correspondent accounts by First Merchant Bank, 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 First Merchant Bank must take all appropriate 
steps to block such indirect access, including, when 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

[[Page 51985]]

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. 
This means that the covered financial institution should not permit 
the foreign bank to establish any new positions or execute any 
transactions through the account, other than those necessary to 
close the account. A covered financial institution may reestablish 
an account closed under the proposed rule if it determines that the 
account will not be used to provide banking services indirectly to 
First Merchant Bank. FinCEN specifically solicits comment on the 
requirement under the proposed rule that a covered financial 
institution block indirect access to First Merchant Bank, once such 
indirect access is identified.
3. Reporting Not Required
    Section 103.189(b)(3) of the proposed rule clarifies that the rule 
does not impose any reporting requirement upon any covered financial 
institution that is not otherwise required by applicable law or 
regulation. A covered financial institution must, however, document its 
compliance with the requirement that it notify its correspondent 
account holders that they may not provide First Merchant Bank 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 First Merchant Bank, and specifically invites comments on the 
following matters:
    1. The appropriate form, scope, and timing 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 First Merchant Bank;
    3. The appropriate steps a covered financial institution should 
take once it identifies an indirect use of one of its correspondent 
accounts by First Merchant Bank; and
    4. The impact of the proposed special measure upon any legitimate 
transactions conducted with First Merchant Bank by United States 
businesses, United Nations agencies, and non-governmental and private 
voluntary organizations doing business in or operating in the ``TRNC.''

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 First Merchant Bank currently maintains only a 
few correspondent accounts in the United States, and that those 
accounts are maintained at 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 
administered by OFAC, which can be easily modified to monitor for the 
use of correspondent accounts by First Merchant Bank. Thus, the special 
due diligence that would be required by this proposed rulemaking--i.e., 
the one-time transmittal of notice to correspondent account holders and 
screening of transactions to identify any indirect use of a 
correspondent account--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 jlackeyj@omb.eop.gov), with a 
copy to FinCEN by mail or e-mail at the addresses previously specified. 
Comments on the collection of information should be received by 
September 23, 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 103.189 
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 
103.189(b)(2)(i) and 31 CFR 103.189(b)(3)(i). The disclosure 
requirement in 31 CFR 103.189(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 
First Merchant Bank. The information required to be maintained by 31 
CFR 103.189(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 103.189. 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 51986]]

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. The undesignated center heading preceding Sec. 103.185 is 
removed.
    3. Subpart I of part 103 is proposed to be amended by adding new 
Sec.  103.189 as follows:


Sec.  103.189  Special measures against First Merchant Bank.

    (a) Definitions. For purposes of this section:
    (1) Correspondent account has the same meaning as provided in Sec.  
103.175(d)(1)(ii).
    (2) Covered financial institution has the same meaning as provided 
in Sec.  103.175(f)(2) and also includes:
    (i) A futures commission merchant or an introducing broker 
registered, or required to register, with the Commodity Futures Trading 
Commission under the Commodity Exchange Act (7 U.S.C. 1 et seq.); and
    (ii) An investment company (as defined in section 3 of the 
Investment Company Act (15 U.S.C. 80a-3)) that is an open-end company 
(as defined in section 5 of the Investment Company Act (15 U.S.C. 80a-
5)) and that is registered, or required to register, with the 
Securities and Exchange Commission under section 8 of the Investment 
Company Act (15 U.S.C. 80a-8).
    (3) First Merchant Bank means any headquarters, branch, office, or 
subsidiary of First Merchant Bank OSH Ltd operating in the ``Turkish 
Republic of Northern Cyprus'' (``TRNC'') or in any other jurisdiction, 
including FMB Finance Ltd (British Virgin Islands), First Merchant 
International Inc (Bahamas), First Merchant Finance Ltd (Ireland), and 
First Merchant Trust Ltd (Ireland).
    (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, First Merchant Bank.
    (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 First Merchant Bank. At a 
minimum, that special due diligence must include:
    (A) Notifying correspondent account holders that they may not 
provide First Merchant Bank 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 First Merchant Bank, 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 First Merchant Bank.
    (iii) A covered financial institution that obtains knowledge that a 
correspondent account is being used by the foreign bank to provide 
indirect access to First Merchant Bank, 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: August 18, 2004.
William J. Fox,
Director, Financial Crimes Enforcement Network.
[FR Doc. 04-19267 Filed 8-23-04; 8:45 am]
BILLING CODE 4810-02-P