[Federal Register Volume 71, Number 50 (Wednesday, March 15, 2006)]
[Rules and Regulations]
[Pages 13260-13267]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-2455]


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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 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, Department of the 
Treasury.

ACTION: Final rule.

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SUMMARY: The Financial Crimes Enforcement Network is issuing a final 
rule imposing a special measure against Commercial Bank of Syria 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: This final rule is effective on April 14, 2006.

FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs 
Division, Financial Crimes Enforcement Network, (800) 949-2732.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory Provisions

    On October 26, 2001, the President signed into law the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56 (USA 
PATRIOT Act). Title III of the USA PATRIOT Act amends the anti-money 
laundering provisions of the Bank Secrecy Act, codified at 12 U.S.C. 
1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314 and 5316-5332, to 
promote the prevention, detection, and prosecution of money laundering 
and the financing of terrorism. Regulations implementing the Bank 
Secrecy Act appear at 31 CFR part 103.\1\ The authority of the 
Secretary of the Treasury (``the Secretary'') to administer the Bank 
Secrecy Act and its implementing regulations has been delegated to the 
Director of the Financial Crimes Enforcement Network.\2\ The Act 
authorizes the Director to issue regulations to require all financial 
institutions defined as such in the Act to maintain or file certain 
reports or records that have been determined to have a high degree of 
usefulness in criminal, tax, or regulatory investigations or 
proceedings, or in the conduct of intelligence or counter-intelligence 
activities, including analysis, to protect against international 
terrorism, and to implement anti-money laundering programs and 
compliance procedures.\3\
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    \1\ The statute generally referred to as the ``Bank Secrecy 
Act,'' Titles I and II of Public Law 91-508, as amended, is codified 
at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314, 
5316-5332. In pertinent part, regulations implementing Title II of 
the Bank Secrecy Act appear at 31 CFR Part 103.
    \2\ Therefore, references to the authority of the Secretary of 
the Treasury under section 311 of the USA PATRIOT Act apply equally 
to the Director of the Financial Crimes Enforcement Network.
    \3\ Language expanding the scope of the Bank Secrecy Act to 
intelligence or counter-intelligence activities to protect against 
international terrorism was added by section 358 of the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism (``USA PATRIOT'') Act of 2001, 
Public Law 107-56 (October 26, 2001).
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    Section 311 of the USA PATRIOT Act added section 5318A to the Bank 
Secrecy Act, granting the Secretary the authority, after 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 domestic 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 we may find that reasonable grounds exist for concluding that a 
jurisdiction, institution, class of transactions, or type of account is 
of primary money laundering concern. The statute also provides similar 
procedures, including factors and consultation requirements, for 
selecting the specific special measures to be imposed against the 
primary money laundering concern.
    Taken as a whole, section 311 provides the Secretary with a range 
of options that can be adapted to target specific money laundering and 
terrorist financing concerns most effectively. These options give us 
the authority to bring additional and useful pressure on those 
jurisdictions and institutions that pose money-laundering threats and 
allow us to take steps to protect the U.S. financial system. Through 
the imposition of various special measures, we can gain more 
information about the concerned jurisdictions, institutions, 
transactions, and accounts; monitor more effectively the respective 
jurisdictions, institutions, transactions, and accounts; and ultimately 
protect U.S. financial institutions from involvement with 
jurisdictions, institutions, transactions, or accounts that pose a 
money laundering concern.
    Before making a finding that reasonable grounds exist for 
concluding that a foreign financial institution is of primary money 
laundering concern, the Secretary is required by the Bank Secrecy Act 
to consult with both the Secretary of State and the Attorney General.
    In addition to these consultations, when finding that a foreign 
financial institution is of primary money laundering concern, the 
Secretary is required by section 311 to consider ``such information as 
[we] determine to

[[Page 13261]]

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 Bank Secrecy Act continue to be 
fulfilled, and to guard against international money laundering and 
other financial crimes.
    If we determine that reasonable grounds exist for concluding that a 
foreign financial institution is of primary money laundering concern, 
we 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, or jointly, in any 
combination, and in any sequence.\4\ In the imposition of special 
measures, we follow procedures similar to those for finding a foreign 
financial institution to be of primary money laundering concern, but we 
also engage in additional consultations and consider additional 
factors. Section 311 requires us to consult with other appropriate 
Federal agencies and parties \5\ and to consider the following specific 
factors:
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    \4\ 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).
    \5\ Section 5318A(a)(4)(A) requires the Secretary to consult 
with the Chairman of the Board of Governors of the Federal Reserve 
System, any other appropriate Federal banking agency, the Secretary 
of State, the Securities and Exchange Commission, the Commodity 
Futures Trading Commission, the National Credit Union 
Administration, and, in our sole discretion, ``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 U.S. national security and 
foreign policy.\6\
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    \6\ Classified information used in support of a section 311 
finding of primary money laundering concern and imposition of 
special 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, Public Law 108-177 (amending 
31 U.S.C. 5318A by adding new paragraph (f)).
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    In this final rule, we are imposing the fifth special measure (31 
U.S.C. 5318A(b) (5)) against Commercial Bank of Syria. The fifth 
special measure prohibits or imposes conditions upon the opening or 
maintaining of correspondent or payable-through accounts for or on 
behalf of the foreign financial institution of primary money laundering 
concern. This special measure may be imposed only through the issuance 
of a regulation.

B. Commercial Bank of Syria

    Commercial Bank of Syria is based in Damascus, Syria, and maintains 
approximately 50 branches and employs about 4,500 persons. All of the 
branches are located in Syria. It was established in Syria in 1967 as 
the single, government-owned bank specializing in servicing foreign 
trade and commercial banking, including foreign exchange transactions. 
Commercial Bank of Syria maintains correspondent accounts with banks in 
countries all over the world, but we are not aware of any correspondent 
accounts with U.S. financial institutions.\7\
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    \7\ Several U.S. banks terminated their correspondent accounts 
with the Commercial Bank of Syria after we found the foreign bank to 
be of primary money laundering concern and proposed imposing the 
fifth special measure.
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    Commercial Bank of Syria has one subsidiary, Syrian Lebanese 
Commercial Bank, located in Beirut, Lebanon. The subsidiary offers 
banking services, with the emphasis on providing import/export 
facilities to individuals in Lebanon and Syria. Syrian Lebanese 
Commercial Bank has two branches in Beirut and two representative 
offices, one in Aleppo and another in Damascus, Syria. We are not aware 
of any correspondent accounts maintained by the Syrian Lebanese 
Commercial Bank with U.S. financial institutions.\8\
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    \8\ For purposes of this document and unless the context 
dictates otherwise, references to Commercial Bank of Syria include 
Syrian Lebanese Commercial Bank, and any other branch, office, or 
subsidiary of Commercial Bank of Syria or Syrian Lebanese Commercial 
Bank.
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    In February 2006, Syria reportedly switched all of its foreign 
currency transactions to euros from U.S. dollars to avoid possible 
settlement problems involving dollar payment systems, apparently in 
anticipation of possible future U.S. Government action. Most of the 
government's foreign currency transactions are conducted through 
Commercial Bank of Syria. Commercial Bank of Syria reportedly has also 
stopped dealing in U.S. dollars for international transactions, such as 
imports, exports, and letters of credit.

II. The 2004 Finding and Subsequent Developments

A. The 2004 Finding

    In May 2004, the Secretary, through the Director of the Financial 
Crimes Enforcement Network, found that reasonable grounds exist for 
concluding that Commercial Bank of Syria, a Syrian government-owned 
bank, is a financial institution of primary money laundering concern. 
This finding was published in the notice of proposed rulemaking, which 
proposed prohibiting U.S. financial institutions from, directly or 
indirectly, opening and maintaining correspondent accounts for 
Commercial Bank of Syria, and any of its branches, offices, and 
subsidiaries, pursuant to the authority under 31 U.S.C. 5318A.\9\ The 
notice of proposed rulemaking outlined the various factors supporting 
the finding and proposed prohibition. In finding Commercial Bank of 
Syria to be of primary money laundering concern, we determined that:
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    \9\ 69 FR 28098 (May 18, 2004).
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     Commercial Bank of Syria was used by criminals to 
facilitate or promote money laundering. In particular, we determined 
Commercial Bank of Syria had been used as a conduit for the laundering 
of proceeds generated from the illicit sale of Iraqi oil and had been 
used by terrorists or persons associated with terrorist 
organizations.\10\
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    \10\ For a more detailed analysis of the finding of primary 
money laundering concern, see the notice of proposed rulemaking.
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     Any legitimate business use of Commercial Bank of Syria 
was significantly outweighed by its use to promote or facilitate money 
laundering and other financial crimes.
     The finding and proposed special measure would prevent 
suspect accountholders at Commercial Bank of Syria from accessing the 
U.S. financial system to facilitate money laundering and would bring 
criminal conduct occurring at or through Commercial

[[Page 13262]]

Bank of Syria to the attention of the international financial community 
and thus serve the purposes of the Bank Secrecy Act.
    We also stated in our finding that Commercial Bank of Syria is 
licensed in Syria, a jurisdiction with very limited money laundering 
controls. Finally, in the notice of proposed rulemaking containing our 
finding, we further stated that Commercial Bank of Syria, as a 
financial entity under the control of a designated State Sponsor of 
Terrorism, provides cause for real concern about terrorist financing 
and money laundering activities.

B. Subsequent Developments

    Commercial Bank of Syria and Syria did not dispute any of these 
grounds for our May 2004 finding of Commercial Bank of Syria as a 
primary money laundering concern. Following this finding, however, 
Commercial Bank of Syria and Syrian government financial authorities 
did engage in initial discussions with the U.S. Department of the 
Treasury to learn more about the bases for the finding and to consider 
developing effective money laundering controls.
    Pursuant to this engagement, Syria has taken certain steps to 
develop an anti-money laundering regime, although these steps are not 
sufficient to address our concerns about money laundering and terrorist 
financing issues within Commercial Bank of Syria. In response to 
international pressure to improve its anti-money laundering regime, 
Syria passed Decree 33 in May 2005, which strengthened an existing 
Anti-Money Laundering Commission (the ``Commission'') \11\ and laid the 
foundation for the development of a financial intelligence unit.\12\ 
Under this law, all banks and non-bank financial institutions are 
required to keep records on transactions exceeding an amount specified 
by the Commission and also on transactions where it is suspected that 
money laundering or terrorist financing is involved. In September 2005, 
the Commission informed banks that they must use know your customer 
procedures to follow up on their customers every three years and that 
they must maintain records on closed accounts for five years. Recent 
legislation has also provided the Central Bank of Syria, the entity 
that issues the national currency, new authority to oversee the banking 
sector and investigate financial crimes. Finally, Syria is working on 
integrating its anti-money laundering efforts with other countries in 
the Middle East and North Africa Financial Action Task Force (``MENA 
FATF'').\13\ Syria will host a team of assessors from the MENA FATF in 
early 2006, which will assess its progress in developing and 
implementing an effective anti-money laundering regime.
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    \11\ The Anti-Money Laundering Commission, created by 
legislation passed in 2003, is the financial intelligence unit for 
Syria and is charged with overseeing all issues related to money 
laundering and terrorist financing, including unveiling bank 
secrecy; establishing memoranda of understandings with counterpart 
financial intelligence units; conducting money laundering and 
terrorist financing inquiries; and freezing suspected accounts.
    \12\ Financial intelligence units are specialized governmental 
agencies created to combat money laundering and terrorist financing. 
The Egmont Group is an international body comprised of Financial 
Intelligence Units from 101 member countries. See http://www.egmontgroup.org.
    \13\ In November 2004, the governments of 14 countries decided 
to establish a Financial Action Task Force regional style body for 
the Middle East and North Africa. The body is known as the Middle 
East and North Africa Financial Action Task Force, or MENA FATF, and 
is headquartered in the Kingdom of Bahrain. See http://www.menafatf.org.
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    Despite these recent enhancements, there remain significant 
jurisdictional anti-money laundering vulnerabilities that have not been 
addressed by necessary legislation or other governmental action. Some 
of these vulnerabilities include the lack of regulation for 
hawaladars,\14\ the failure to address cash smuggling and other 
criminal movement across the country's porous borders and the rampant 
corruption among Syria's political and business elite. In addition, 
Syrian law does not establish terrorist financing as a predicate 
offense for money laundering. Furthermore, Syria's free trade zones 
\15\ provide significant opportunities for laundering the proceeds of 
criminal activities because the Syrian General Directorate of Customs 
does not have effective oversight procedures to monitor goods that move 
through the zones. Finally, Syria faces serious ongoing challenges in 
implementing its anti-money laundering regime. Syria has failed to 
issue implementing rules for Decree 33, making adequate implementation 
and enforcement of the law questionable. Syria does not appear to have 
taken any significant regulatory, law enforcement or prosecutorial 
action with respect to any money laundering or terrorist financing 
activity in Syria, despite the terrorist financing and money laundering 
concerns associated with Commercial Bank of Syria as identified in our 
May 2004 finding.
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    \14\ Hawala is an alternative or parallel trust-based remittance 
system. It exists and operates outside of, or parallel to 
`traditional' banking or financial channels. The person who operates 
a hawala is commonly referred to as a hawaladar.
    \15\ An area of a country specifically set apart or an adjacent 
port where there is an exemption of duty rights for foreign goods.
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    These jurisdictional money laundering and terrorist financing 
vulnerabilities are exacerbated by Syria's ongoing support for 
terrorist activity. Syria has been designated by the U.S. Government as 
a State Sponsor of Terrorism since 1979.\16\ As of 2006, the Syrian 
Government continued to provide material support to Lebanese Hizballah 
and Palestinian terrorist groups. HAMAS, Palestinian Islamic Jihad 
(PIJ), and the Popular Front for the Liberation of Palestine (PFLP), 
among others, continue to maintain offices in Damascus, from which 
their members direct public relations and fundraising activities and 
provide guidance to terrorist operatives and fundraisers in the West 
Bank, Gaza, and across the region. For example, according to a 
significant volume of information available to the U.S. Government, PIJ 
leadership in Damascus, Syria controls all PIJ officials, activists and 
terrorists in the West Bank and Gaza. Syria-based PIJ leadership was 
implicated in the February 2005 terrorist attack in Tel Aviv, Israel 
that killed five and wounded over 50.
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    \16\ Syria is designated as a state sponsor of terrorism, under 
section 6(j) of the Export Administration Act (``EAA'') of 1979, 50 
U.S.C. App. 2405. Section 321 of the Antiterrorism and Effective 
Death Penalty Act of 1996 (AEDPA), Public Law 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 under section 6(j) of 
the EAA 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. See 31 CFR parts 596, 504, 542.102.
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    As late as 2005, Syrian Military Intelligence (SMI) official Assef 
Shawkat met with terrorist leaders Hassan Nasrallah of Hizballah, Ahmed 
Jibril of Popular Front for the Liberation of Palestine, and Abdullah 
Ramadan Shallah of Palestinian Islamic Jihad, in addition to Hamas 
officials, to discuss coordination and cooperation with the Syrian 
government. Shawkat managed a branch of SMI charged with overseeing 
liaison relations with major terrorist groups resident in Damascus.\17\ 
In January 2006, the Syrian Government facilitated a meeting in 
Damascus between Iranian government officials

[[Page 13263]]

and several designated terrorist leaders, including, Abdullah Ramadan 
Shallah, Ahmed Jibril, Hassan Nasrallah, and Khaled Mishal of Hamas. 
The Syrian Government also continues to permit Iran to use Damascus as 
a transshipment point for re-supplying Lebanese Hizballah in Lebanon.
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    \17\ In January 2006, Assef Shawkat was named a Specially 
Designated National by the U.S. Government under Executive Order 
13338.
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    These ongoing terrorist activities supported by Syria as a 
designated State Sponsor of Terrorism, coupled with the continuing 
jurisdictional vulnerabilities associated with Syria's weak money 
laundering and terrorist financing controls, continue to be directly 
relevant to our 2004 finding that Commercial Bank of Syria is of 
primary money laundering concern. As stated above, Commercial Bank of 
Syria is a Syrian government-owned and controlled bank. As such, 
Commercial Bank of Syria presents a direct and ongoing opportunity for 
the Syrian government to continue to support and finance terrorist 
activity. This risk, in addition to the uncontested and ongoing money 
laundering and terrorist financing concerns associated with Commercial 
Bank of Syria as described in our May 2004 finding, further 
substantiates our belief that Commercial Bank of Syria is of primary 
money laundering concern. Accordingly, our finding remains that 
Commercial Bank of Syria is a financial institution of primary money 
laundering concern.

III. Imposition of the Fifth Special Measure

    Consistent with the finding that Commercial Bank of Syria is a 
financial institution of primary money laundering concern, and based 
upon additional consultations with required Federal agencies and 
departments and consideration of additional relevant factors, including 
the comments received for the proposed rule, we are imposing the 
special measure authorized by 31 U.S.C. 5318A(b)(5) with regard to 
Commercial Bank of Syria.\18\ That special measure authorizes the 
prohibition of, or the imposition of conditions upon, the opening or 
maintaining of correspondent or payable-through accounts \19\ 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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    \18\ Supra footnote 4.
    \19\ For purposes of the 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 (31 
U.S.C. 5318A(e)(1)(B) as implemented in 31 CFR 103.175(d)(1)(ii)).
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1. Similar Actions Have Not Been or May Not Be Taken by Other Nations 
or Multilateral Groups Against Commercial Bank of Syria

    At this time, other countries have not taken any action similar to 
the imposition of the fifth special measure of section 311, that which 
prohibits U.S. financial institutions and financial agencies from 
opening or maintaining a correspondent account for or on behalf of 
Commercial Bank of Syria or that requires those institutions and 
agencies to guard against indirect use by Commercial Bank of Syria. 
Especially in response to Syria's recent conversion from U.S. dollars 
to euros for foreign currency transactions, we encourage other 
countries to take similar action based on our finding that Commercial 
Bank of Syria is a financial institution of primary money laundering 
concern.

2. The Imposition of the Fifth Special Measure Would Not 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 imposed by this rule prohibits covered 
financial institutions from opening or maintaining correspondent 
accounts for, or on behalf of, Commercial Bank of Syria. As a corollary 
to this measure, covered financial institutions also are required to 
take reasonable steps to apply due diligence to all of their 
correspondent accounts to ensure that no such account is being used 
indirectly to provide services to Commercial Bank of Syria. The burden 
associated with these requirements is not expected to be significant, 
given that we are not aware of any U.S. financial institutions that 
maintain correspondent accounts directly for Commercial Bank of Syria. 
Moreover, there is a minimal burden involved in transmitting a one-time 
notice to all correspondent accountholders concerning the prohibition 
on providing services to Commercial Bank of Syria indirectly.
    In addition, U.S. financial institutions generally apply some 
degree of due diligence in screening their transactions and accounts, 
often through the use of commercially available software, such as that 
used for compliance with the economic sanctions programs administered 
by the Office of Foreign Assets Control 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 
existing screening procedures to comply with this special measure. 
Thus, the due diligence that is required by this rule is not expected 
to impose a significant additional burden upon covered financial 
institutions.

3. The Action or Timing of the Action Will Not Have a Significant 
Adverse Systemic Impact on the International Payment, Clearance, and 
Settlement System, or on Legitimate Business Activities of the 
Commercial Bank of Syria

    Commercial Bank of Syria 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. 
Furthermore, since the issuance of the notice of proposed rulemaking in 
2004, we have become aware of additional financial institutions that 
have been established in Syria to engage in international transactions. 
Thus, the imposition of the fifth special measure against Commercial 
Bank of Syria will not have a significant adverse systemic impact on 
the international payment, clearance, and settlement system. In 
addition, we believe that any legitimate use of Commercial Bank of 
Syria is significantly outweighed by its reported use to promote or 
facilitate money laundering and terrorist financing.

4. The Action Enhances the United States' National Security and 
Complements the United States' Foreign Policy

    The exclusion from the U.S. financial system of banks that serve as 
conduits for significant money laundering activity and that participate 
in other financial crime enhances national security by making it more 
difficult for criminals to access the substantial resources and 
services of the U.S. financial system. In addition, the imposition of 
the fifth special measure against Commercial Bank of Syria complements 
the U.S. Government's overall foreign policy strategy of making entry 
into the U.S. financial system more difficult for high-risk financial 
institutions located in jurisdictions with weak or poorly enforced 
anti-money laundering controls.

IV. Notice of Proposed Rulemaking and Comments

    We have not become aware of any information inconsistent with our 
determination that there are reasonable grounds to find that Commercial 
Bank of Syria is a financial institution of a primary money laundering 
concern. In response to the 2004 notice of proposed

[[Page 13264]]

rulemaking, we did not receive any comments from Commercial Bank of 
Syria or any other entity disputing that the imposition of the fifth 
special measure was warranted. We did receive two comment letters, both 
from domestic associations representing segments of the U.S. financial 
industry, which supported the finding and special measure, but sought 
clarification regarding particular obligations of domestic 
institutions, as detailed below.
    One trade association comment stated that the relative 
unavailability of certain banking services in Syria through 
institutions other than Commercial Bank of Syria, particularly with 
respect to foreign currency transactions, would cause undue burden on 
legitimate U.S. business activities in Syria, as well as on Syrian 
diplomatic activities in the United States. In response to this 
comment, we note that during the past year, private banks have been 
established in Syria to conduct foreign transactions. Accordingly, 
Commercial Bank of Syria is no longer the only financial institution in 
Syria that can engage in international transactions, and legitimate 
U.S. businesses may continue transacting with other institutions.
    In the notice of proposed rulemaking, we specifically solicited 
comment on the impact of the fifth special measure on legitimate 
business involving Commercial Bank of Syria, and we understand that 
this measure may require legitimate businesses to make alternative 
banking arrangements. Since the issuance of the notice of proposed 
rulemaking, however, the privately owned Syrian banking sector has 
expanded significantly, increasing the availability of alternative 
banking services as mentioned above.
    One trade association comment letter requested clarification of the 
proposed rule with regard to standby letters of credit.\20\ The 
commenter stated that a U.S. business might have contracts in Syria 
guaranteed by renewable standby letters of credit issued by a U.S. 
bank. The commenter sought clarification as to whether this rulemaking 
would require the U.S. bank to terminate the letter of credit, which 
would then require payment by the U.S. bank to Commercial Bank of 
Syria.
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    \20\ A standby letter of credit is a credit instrument issued by 
a bank that represents an obligation by the issuing bank on a 
designated third party (the beneficiary), that is contingent on the 
failure of the bank's customer to perform under the terms of a 
contract with the beneficiary. A standby letter of credit is most 
often used as a credit enhancement, with the understanding that, in 
most cases, it will never be drawn against or funded. Barron's 
Dictionary of Banking Terms (Fourth Edition).
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    As described by the commenter, the issuance of a standby letter of 
credit by a covered financial institution does not create a 
correspondent account relationship as defined in 31 CFR 
103.175(d)(1)(ii) between the covered financial institution and 
Commercial Bank of Syria. The commenter described a scenario in which a 
U.S. business seeks a standby letter of credit in favor of Commercial 
Bank of Syria so that Commercial Bank of Syria is ultimately not at 
risk should the U.S. business fail to perform on a services contract. 
In such a situation, no formal banking or business relationship is 
established between the covered financial institution and Commercial 
Bank of Syria. Thus, this final rule--which only applies to 
correspondent account relationships--does not require the termination 
of standby letters of credit described by the commenter.
    The first trade association commenter requested clarification on 
whether a final rule could require a covered financial institution to 
reject a funds transfer involving Commercial Bank of Syria. The fifth 
special measure imposed in this rule prohibits covered financial 
institutions from opening or maintaining correspondent accounts for or 
on behalf of Commercial Bank of Syria. As explained in detail below, a 
covered financial institution must take reasonable steps to identify 
indirect use of its correspondent accounts by Commercial Bank of Syria 
through other foreign banks. Institutions that detect such indirect 
access, such as identifying a funds transfer involving Commercial Bank 
of Syria, must take all appropriate steps to prevent such indirect 
access, including, if necessary, the termination of the correspondent 
account.
    The same commenter also sought guidance on whether there is an 
expectation for banks to file suspicious activity reports merely 
because a transaction with a connection to Commercial Bank of Syria was 
attempted or completed. A covered financial institution is not required 
to automatically and without inquiry file a suspicious activity report 
based solely on the fact that a transaction involves Commercial Bank of 
Syria. However, a covered financial institution must file a suspicious 
activity report if it becomes aware, after further investigation, that 
the triggers for filing such a report and the applicable thresholds 
have been met.\21\
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    \21\ Suspicious Activity Reporting rules are promulgated at 31 
CFR 103.17-103.21.
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    The second trade association comment, addressing the requirement 
that a covered institution provide notice to its foreign correspondents 
regarding this rule, is addressed in the section-by-section analysis 
below.

V. Section-by-Section Analysis

    The final rule prohibits covered financial institutions from 
opening or maintaining any correspondent account for, or on behalf of, 
Commercial Bank of Syria. Covered financial institutions are required 
to apply due diligence to their correspondent accounts to guard against 
their indirect use by Commercial Bank of Syria. At a minimum, that due 
diligence must include two elements. First, a covered financial 
institution must notify its correspondent account holders that the 
account may not be used to provide Commercial Bank of Syria with access 
to the covered financial institution. Second, a covered financial 
institution must take 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 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 Commercial Bank of Syria, based on risk factors such as the 
type of services offered by, and geographic locations of, its 
correspondents.

A. 103.188(a)--Definitions

1. Commercial Bank of Syria
    Section 103.188(a)(1) of the rule defines Commercial Bank of Syria 
to include all branches, offices, and subsidiaries of Commercial Bank 
of Syria operating in Syria or in any other jurisdiction. The one known 
subsidiary of Commercial Bank of Syria, Syrian Lebanese Commercial 
Bank, and any of its branches or offices, is included in the 
definition. We 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, 
branch, or office of Commercial Bank of Syria.
2. Correspondent Account
    Section 103.188(a)(2) 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 for a foreign bank to

[[Page 13265]]

receive deposits from, or make payments or other disbursements on 
behalf of, the foreign bank, or handle other financial transactions 
related to the foreign bank.
    In the case of a U.S. depository institution, this broad definition 
includes most types of banking relationships between a U.S. depository 
institution and a foreign bank, established to provide regular 
services, dealings, and other financial transactions including a demand 
deposit, savings deposit, or other transaction or asset account and a 
credit account or other extension of credit.
    In the case of securities broker-dealers, futures commission 
merchants, introducing brokers in commodities, and investment companies 
that are open-end companies (mutual funds), we are using the same 
definition of ``account'' for purposes of this rule as that established 
in the final rule implementing section 312 of the USA PATRIOT Act.\22\
---------------------------------------------------------------------------

    \22\ See 71 FR 496, 512-13 (January 4, 2006), codified at 31 CFR 
103.175(d)(2)(ii)-(iv).
---------------------------------------------------------------------------

3. Covered Financial Institution
    Section 103.188(a)(3) of the rule defines covered financial 
institution by reference to 31 CFR 103.175(f)(1). Thus a covered 
financial institution includes the following:
     An insured bank (as defined in section 3(h) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(h));
     A commercial bank;
     An agency or branch of a foreign bank in the United 
States;
     A federally insured credit union;
     A savings association;
     A corporation acting under section 25A of the Federal 
Reserve Act (12 U.S.C. 611 et seq.);
     A trust bank or trust company that is federally regulated 
and is subject to an anti-money laundering program requirement;
     A broker or dealer in securities registered, or required 
to be registered, with the Securities and Exchange Commission under the 
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), except persons 
who register pursuant to section 15(b)(11) of the Securities Exchange 
Act of 1934;
     A futures commission merchant or an introducing broker 
registered, or required to be registered, with the Commodity Futures 
Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et 
seq.), except persons who register pursuant to section 4(f)(a)(2) of 
the Commodity Exchange Act; and
     A mutual fund, which means an investment company (as 
defined in section 3(a)(1) of the Investment Company Act of 1940 
((``Investment Company Act'') (15 U.S.C. 80a-3(a)(1)) that is an open-
end company (as defined in section 5(a)(1) of the Investment Company 
Act (15 U.S.C. 80a-5(a)(1)) and that is registered, or is required to 
register, with the Securities and Exchange Commission pursuant to the 
Investment Company Act.
    In the notice of proposed rulemaking, we defined ``covered 
financial institution'' by reference to 31 CFR 103.175(f)(2), the 
operative definition of that term for purposes of the rules 
implementing sections 313 and 319 of the USA Patriot Act, and also 
included in the definition futures commission merchants, introducing 
brokers, and mutual funds. The definition of ``covered financial 
institution'' we are adopting for purposes of this final rule is 
substantially the same.

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

    For purposes of complying with the rule's prohibition on the 
opening or maintaining of correspondent accounts for, or on behalf of, 
Commercial Bank of Syria, we expect a covered financial institution to 
take steps analogous to those 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 103.188(b)(1) of the rule prohibits all covered financial 
institutions from opening or maintaining a correspondent account in the 
United States for, or on behalf of, Commercial Bank of Syria. The 
prohibition requires all covered financial institutions to review their 
account records to ensure that they maintain no accounts directly for, 
or on behalf of, Commercial Bank of Syria.
2. 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 Commercial Bank of Syria, section 
103.188(b)(2) requires a covered financial institution to apply 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 due diligence must include notifying correspondent 
account holders that the account may not be used to provide Commercial 
Bank of Syria with access to 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:

Notice: Pursuant to U.S. regulations issued under section 311 of the 
USA PATRIOT Act, 31 CFR 103.188, we are prohibited from opening or 
maintaining a correspondent account for, or on behalf of, Commercial 
Bank of Syria or any of its subsidiaries (including Syrian Lebanese 
Commercial Bank). The regulations also require us to notify you that 
your correspondent account with our financial institution may not be 
used to provide Commercial Bank of Syria or any of its subsidiaries 
with access to our financial institution. If we become aware that 
Commercial Bank of Syria 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 
prevent such access, including terminating your account.

    The purpose of the notice requirement is to help ensure that 
Commercial Bank of Syria is denied access to the U.S. financial system, 
as well as to increase awareness within the international financial 
community of the risks and deficiencies of Commercial Bank of Syria. 
However, we do 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 holders, informing those holders that the 
accounts may not be used to provide Commercial Bank of Syria with 
indirect access to the covered financial institution, or including such 
information in the next regularly occurring transmittal from the 
covered financial institution to its correspondent account holders.
    In its comment letter, one trade association requested that we 
consider permitting other methods of providing notice to correspondent 
account holders or allowing sufficient flexibility so that covered 
financial institutions can use systems already established under other 
provisions of the USA PATRIOT Act to provide notice. As we stated in 
the notice of proposed rulemaking, a covered financial institution is 
not obligated to use any specific form or method in notifying its 
correspondent account holders of the special measure. We suggested the 
provision of written notice containing certain language as only one 
example of how a covered financial institution could comply with its 
obligation to notify its

[[Page 13266]]

correspondents. The trade association further suggested that we 
specifically consider means such as including the notice within the 
certificates used by financial institutions to comply with the rules 
issued under sections 313 and 319 of the USA PATRIOT Act. While there 
may be circumstances where this would be appropriate, we note that 
those certificates are renewable every three years, and that relying 
solely on the certification process for notice purposes would not be 
reasonable where a re-certification would not be made within a 
reasonable time following the issuance of this final rule. Furthermore, 
we are not requiring that covered financial institutions obtain a 
certification regarding compliance with the final rule from each 
correspondent accountholder.
    This rule also requires a covered financial institution to take 
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 by the 
covered financial institution in the normal course of business. For 
example, a covered financial institution is expected to apply an 
appropriate screening mechanism to be able to identify a funds transfer 
order that, on its face, lists Commercial Bank of Syria as the 
originator's or beneficiary's financial institution, or otherwise 
references Commercial Bank of Syria in a manner detectable under the 
financial institution's normal business screening procedures. We 
acknowledge that not all institutions are capable of screening every 
field in a funds transfer message, and that the risk-based controls of 
some institutions may not require such comprehensive screening. 
Alternatively, other institutions may perform more thorough screening 
as part of their risk-based determination to perform ``additional due 
diligence,'' as described below. An appropriate screening mechanism 
could be the mechanism currently used by a covered financial 
institution to comply with various legal requirements, such as the 
commercially available software used to comply with the sanctions 
programs administered by the Office of Foreign Assets Control.
    Notifying its correspondent account holders and taking reasonable 
steps to identify any indirect use of its correspondent accounts by 
Commercial Bank of Syria in the manner discussed above are the minimum 
due diligence requirements under this final 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 Commercial Bank of Syria, 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 Commercial Bank of Syria must take all appropriate 
steps to prevent 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. We have added 
language in the final rule clarifying that should the foreign bank 
refuse to comply, or if the covered financial institution cannot obtain 
adequate assurances that the account will not be available to 
Commercial Bank of Syria, 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 this rule 
if it determines that the account will not be used to provide banking 
services indirectly to Commercial Bank of Syria.
3. Reporting Not Required
    Section 103.188(b)(3) of the 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, however, must document its compliance 
with the requirement that it notify its correspondent account holders 
that the accounts may not be used to provide Commercial Bank of Syria 
with access to the covered financial institution.

VI. Regulatory Flexibility Act

    It is hereby certified that this rule will not have a significant 
economic impact on a substantial number of small entities. Commercial 
Bank of Syria no longer holds correspondent accounts in the United 
States. The U.S. correspondent accounts that the bank previously held, 
as well as the U.S. correspondent accounts of foreign banks that still 
maintain a correspondent relationship with Commercial Bank of Syria, 
were with large banks. Thus, the prohibition on establishing or 
maintaining such correspondent accounts will not have a significant 
impact on a substantial number of small entities. In addition, all 
covered financial institutions currently must exercise some degree of 
due diligence in order to comply with various legal requirements. The 
tools used for such purposes, including commercially available software 
used to comply with the economic sanctions programs administered by the 
Office of Foreign Assets Control, can be modified to monitor for the 
use of correspondent accounts by Commercial Bank of Syria. Thus, the 
due diligence that is required by this rule-- 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.

VII. Paperwork Reduction Act of 1995

    The collection of information contained in the final rule has been 
approved by the Office of Management and Budget (OMB) in accordance 
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), and 
assigned OMB Control Number 1506-0036. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a valid control number assigned by OMB.
    The only requirements in the final rule that are subject to the 
Paperwork Reduction Act are the requirements that a covered financial 
institution notify its correspondent account holders that the 
correspondent accounts maintained on their behalf may not be used to 
provide Commercial Bank of Syria with access to the covered financial 
institution and the requirement that a covered financial institution 
document its compliance with its obligation to notify its 
correspondents. The estimated annual average burden associated with 
this collection of information is one hour per affected financial 
institution. We received no comments on this information collection 
burden estimate.
    Comments concerning the accuracy of this information collection 
estimate and suggestions for reducing this burden 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, Washington, DC 20503 (or by the Internet to 
[email protected]), with a copy to the Financial Crimes 
Enforcement Network by paper mail to

[[Page 13267]]

FinCEN, P.O. Box 39, Vienna, VA 22183, ``ATTN: Section 311--Imposition 
of Special Measure Against Commercial Bank of Syria'' or by electronic 
mail to [email protected] with the caption ``ATTN: Section 
311--Imposition of Special Measure Against Commercial Bank of Syria'' 
in the body of the text.

VIII. Executive Order 12866

    This 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

0
For the reasons set forth in the preamble, part 103 of title 31 of the 
Code of Federal Regulations is amended as follows:

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

0
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.


0
2. Subpart I of part 103 is amended by adding new Sec.  103.188 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 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 includes:
    (i) An insured bank (as defined in section 3(h) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(h)));
    (ii) A commercial bank;
    (iii) An agency or branch of a foreign bank in the United States;
    (iv) A federally insured credit union;
    (v) A savings association;
    (vi) A corporation acting under section 25A of the Federal Reserve 
Act (12 U.S.C. 611 et seq.);
    (vii) A trust bank or trust company that is federally regulated and 
is subject to an anti-money laundering program requirement;
    (viii) A broker or dealer in securities registered, or required to 
be registered, with the Securities and Exchange Commission under the 
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), except persons 
who register pursuant to section 15(b)(11) of the Securities Exchange 
Act of 1934;
    (ix) A futures commission merchant or an introducing broker 
registered, or required to be registered, with the Commodity Futures 
Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et 
seq.), except persons who register pursuant to section 4(f)(a)(2) of 
the Commodity Exchange Act; and
    (x) A mutual fund, which means an investment company (as defined in 
section 3(a)(1) of the Investment Company Act of 1940 ((``Investment 
Company Act'') (15 U.S.C. 80a-3(a)(1))) that is an open-end company (as 
defined in section 5(a)(1) of the Investment Company Act (15 U.S.C. 
80a-5(a)(1))) and that is registered, or is required to register, with 
the Securities and Exchange Commission pursuant to the Investment 
Company Act.
    (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 
open or maintained in the United States for, or on behalf of, 
Commercial Bank of Syria.
    (2) Due diligence of correspondent accounts to prohibit indirect 
use. (i) A covered financial institution shall apply 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 due 
diligence must include:
    (A) Notifying correspondent account holders that the correspondent 
account may not be used to provide Commercial Bank of Syria with access 
to 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 prevent such indirect access, including, where necessary, 
terminating the correspondent account.
    (iv) A covered financial institution required to terminate a 
correspondent account pursuant to paragraph (b)(2)(iii) of this 
section:
    (A) Should do so within a commercially reasonable time, and should 
not permit the foreign bank to establish any new positions or execute 
any transaction through such correspondent account, other than those 
necessary to close the correspondent account; and
    (B) May reestablish a correspondent account closed pursuant to this 
paragraph if it determines that the correspondent account will not be 
used to provide banking services indirectly to Commercial Bank of 
Syria.
    (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: March 9, 2006.
Robert Werner,
Director, Financial Crimes Enforcement Network.
[FR Doc. 06-2455 Filed 3-14-06; 8:45 am]
BILLING CODE 4810-02-P