[Federal Register Volume 76, Number 228 (Monday, November 28, 2011)]
[Proposed Rules]
[Pages 72878-72885]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-30331]


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DEPARTMENT OF THE TREASURY

31 CFR Chapter X

RIN 1506-AB16


Financial Crimes Enforcement Network; Amendment to the Bank 
Secrecy Act Regulations--Imposition of Special Measure Against the 
Islamic Republic of Iran as a Jurisdiction of Primary Money Laundering 
Concern

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

ACTION: Notice of proposed rulemaking.

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SUMMARY: In a notice of finding published elsewhere in this issue of 
the Federal Register, the Secretary of the Treasury, through his 
delegate, the Director of FinCEN, found that reasonable grounds exist 
for concluding that the Islamic Republic of Iran (``Iran'') is a 
jurisdiction of primary money laundering concern pursuant to 31 U.S.C. 
5318A. FinCEN is issuing this notice of proposed rulemaking to impose a 
special measure against Iran.

DATES: Written comments on the notice of proposed rulemaking must be 
submitted on or before January 27, 2012.

ADDRESSES: You may submit comments, identified by RIN 1506-AB16, by any 
of the following methods:
     Federal E-rulemaking Portal: http:/www.regulations.gov. 
Follow the instructions for submitting comments. Include 1506-AB16 in 
the submission. Refer to Docket Number FINCEN-2011-0008.
     Mail: The Financial Crimes Enforcement Network, P.O. Box 
39, Vienna, VA 22183. Include RIN 1506-AB16 in the body of the text. 
Please submit comments by one method only.

Comments submitted in response to this NPRM will become a matter of 
public record. Therefore, you should submit only information that you 
wish to make publicly available.
    Inspection of comments: Public comments received electronically or 
through the U. S. Postal Service sent in response to a notice and 
request for comment will be made available for public review as soon as 
possible on http://www.regulations.gov. Comments received may be 
physically inspected in the FinCEN reading room located in Vienna, 
Virginia. Reading room appointments are available weekdays (excluding 
holidays) between 10 a.m. and 3 p.m., by calling the Disclosure Officer 
at (703) 905-5034 (not a toll-free call).

FOR FUTHER INFORMATION CONTACT: The FinCEN regulatory helpline at (800) 
949-2732 and select Option 6.

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 (the ``USA PATRIOT Act''), 
Public Law 107-56. Title III of the USA PATRIOT Act amends the anti-
money laundering provisions of the Bank Secrecy Act (``BSA''), codified 
at 12 U.S.C. 1829b and 1951-1959, and 31 U.S.C. 5311-5314, and 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 Chapter X. The 
authority of the Secretary of the Treasury (the ``Secretary'') to 
administer the BSA and its implementing regulations has been delegated 
to the Director of FinCEN.\1\
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    \1\ 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 FinCEN.
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    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 transaction, 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 conclude that a jurisdiction, 
institution, class of transaction, or type of account is of primary 
money laundering concern. The statute also provides similar procedures, 
i.e., 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 the 
Secretary the authority to bring additional 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 jurisdictions, institutions, 
transactions, or accounts of concern; can more effectively monitor the 
respective jurisdictions, institutions,

[[Page 72879]]

transactions, or accounts; or can protect U.S. financial institutions 
from involvement with jurisdictions, institutions, transactions, or 
accounts that are of money laundering concern.
    Before making a finding that reasonable grounds exist for 
concluding that a jurisdiction is of primary money laundering concern, 
the Secretary is required to consult with both the Secretary of State 
and the Attorney General. The Secretary is also required by section 
311, as amended,\2\ to consider ``such information as the Secretary 
determines to be relevant, including the following potentially relevant 
factors,'' which extend the Secretary's consideration beyond 
traditional money laundering concerns to issues involving, inter alia, 
terrorist financing and weapons proliferation:
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    \2\ 31 U.S.C. 5318A was amended by section 501 of the Iran 
Freedom Support Act of 2006, Public Law 109-293.
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     Evidence that organized criminal groups, international 
terrorists, or entities involved in the proliferation of weapons of 
mass destruction or missiles, have transacted business in that 
jurisdiction;
     The extent to which that jurisdiction or financial 
institutions operating in that jurisdiction offer bank secrecy or 
special regulatory advantages to nonresidents or nondomiciliaries of 
that jurisdiction;
     The substance and quality of administration of the bank 
supervisory and counter-money laundering laws of that jurisdiction;
     The relationship between the volume of financial 
transactions occurring in that jurisdiction and the size of the economy 
of the jurisdiction;
     The extent to which that jurisdiction is characterized as 
an offshore banking or secrecy haven by credible international 
organizations or multilateral expert groups;
     Whether the United States has a mutual legal assistance 
treaty with that jurisdiction, and the experience of United States law 
enforcement officials and regulatory officials in obtaining information 
about transactions originating in or routed through or to such 
jurisdiction; and
     The extent to which that jurisdiction is characterized by 
high levels of official or institutional corruption.
    If the Secretary determines that reasonable grounds exist for 
concluding that a jurisdiction 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.\3\ The Secretary's imposition of 
special measures requires additional consultations to be made and 
factors to be considered. The statute requires the Secretary to consult 
with appropriate federal agencies and other interested parties \4\ and 
to consider the following specific factors:
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    \3\ 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)(l)-(5). For a complete discussion of the range of 
possible countermeasures, see 68 FR 18917 (April 17, 2003) 
(proposing special measures against Nauru).
    \4\ 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 on domestic financial 
institutions opening or maintaining correspondent account 
relationships with the designated jurisdiction.
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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 measures 
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 jurisdiction; and
     The effect of the action on United States national 
security and foreign policy.

B. Finding

    Today, as detailed elsewhere in this part,\5\ based upon a review 
and analysis of the administrative record in this matter, consultations 
with relevant Federal agencies and departments, and after consideration 
of the factors enumerated in section 311, the Director of FinCEN has 
determined that reasonable grounds exist for concluding that the 
Islamic Republic of Iran is a jurisdiction of primary money laundering 
concern.\6\
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    \5\ See the notice of this finding published elsewhere today in 
the Federal Register.
    \6\ Classified information used in support of a section 311 
finding and measure(s) may be submitted by Treasury to a reviewing 
court ex parte and in camera. See section 376 of the Intelligence 
Authorization Act for fiscal year 2004, Public Law 108-177 (amending 
31 U.S.C. 5318A by adding new paragraph (f)).
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II. Imposition of Special Measure Against the Islamic Republic of Iran 
as a Jurisdiction of Primary Money Laundering Concern, Including the 
Central Bank of Iran Within the Definition of Iranian Banking 
Institution

    As a result of that finding, and based upon the additional 
consultations and the consideration of all relevant factors discussed 
in the finding and in this notice of proposed rulemaking, the Director 
of FinCEN has determined that reasonable grounds exist for the 
imposition of the fifth special measure authorized by section 
5318A(b)(5).\7\ That special measure authorizes a prohibition against 
the opening or maintaining of correspondent accounts \8\ by any 
domestic financial institution or agency for or on behalf of a foreign 
banking institution, if the correspondent account involves the targeted 
jurisdiction. A discussion of the section 311 factors relevant to 
imposing this particular special measure follows.
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    \7\ In connection with this action, FinCEN consulted with staffs 
of the Federal functional regulators, the Department of Justice, and 
the Department of State.
    \8\ 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 Iran

    The United Nations Security Council has adopted multiple 
resolutions imposing sanctions on Iran for its refusal to comply with 
international nuclear obligations and proliferation sensitive 
activities, including United Nations Security Council resolutions 
(``UNSCRs'') 1696,\9\ 1737,\10\ 1747,\11\

[[Page 72880]]

1803,\12\ and 1929.\13\ All resolutions were reaffirmed in 2008, 2009, 
and 2010 through UNSCRs 1835,\14\ 1887,\15\ and 1929,\16\ respectively.
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    \9\ For a complete discussion of the sanctions adopted by UNSCR 
1696, see ``Resolution 1696,'' United Nations Security Council, July 
31, 2006 (http://www.un.org/Docs/sc/unsc_resolutions06.htm).
    \10\ For a complete discussion of the sanctions adopted by UNSCR 
1737, see ``Resolution 1737,'' United Nations Security Council, 
December 23, 2006 (http://www.un.org/Docs/sc/unsc_resolutions06.htm).
    \11\ For a complete discussion of the sanctions adopted by UNSCR 
1747, see ``Resolution 1747,'' United Nations Security Council, 
March 24, 2007 (http://www.un.org/Docs/sc/unsc_resolutions07.htm).
    \12\ For a complete discussion of the sanctions adopted by UNSCR 
1803, see ``Resolution 1803,'' United Nations Security Council, 
March 3, 2008 (http://www.un.org/Docs/sc/unsc_resolutions08.htm).
    \13\ For a complete discussion of the sanctions adopted by UNSCR 
1929, see ``Resolution 1929,'' United Nations Security Council, June 
9, 2010 (http://www.un.org/Docs/sc/unsc_resolutions10.htm).
    \14\ See ``Resolution 1835,'' United Nations Security Council, 
September 27, 2008 (http://www.un.org/Docs/sc/unsc_resolutions08.htm).
    \15\ See ``Resolution 1887,'' United Nations Security Council, 
September 24, 2009 (http://www.un.org/Docs/sc/unsc_resolutions09.htm).
    \16\ See ``Resolution 1929,'' United Nations Security Council, 
June 9, 2010 (http://www.un.org/Docs/sc/unsc_resolutions10.htm).
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    Iran's serious deficiencies with respect to anti-money laundering/
countering the financing of terrorism (``AML/CFT'') controls have long 
been highlighted by numerous international bodies and government 
agencies. Starting in October 2007, the Financial Action Task Force 
(``FATF'') has issued a series of public statements expressing its 
concern that Iran's lack of a comprehensive AML/CFT regime represents a 
significant vulnerability within the international financial system. 
The statements further called upon Iran to address those deficiencies 
with urgency, and called upon FATF-member countries to advise their 
institutions to conduct enhanced due diligence with respect to the 
risks associated with Iran's deficiencies.\17\
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    \17\ In response to concerns raised by these FATF and IMF 
reports, FinCEN issued an advisory on October 16, 2007 to financial 
institutions regarding the heightened risk of Iranian ``money 
laundering, terrorist financing, and weapons of mass destruction 
proliferation financing.'' The advisory further cautioned 
institutions that there may be an increased effort by Iranian 
entities to circumvent international sanctions and related financial 
community scrutiny through the use of deceptive practices. See 
``Guidance to Financial Institutions on the Increasing Money 
Laundering Threat Involving Illicit Iranian Activity,'' FinCEN, 
October 16, 2007 (http://www.fincen.gov/statutes_regs/guidance/pdf/guidance_fi_increasing_mlt_iranian.pdf). The FATF simultaneously 
published guidance to assist countries with implementation of UNSCRs 
1737 and 1747. See ``Guidance Regarding the Implementation of 
Activity-Based Financial Prohibitions of United Nations Security 
Council Resolution 1737,'' October 12, 2007 (http://www.fatf-gafi.org/dataoecd/43/17/39494050.pdf) and ``Guidance Regarding the 
Implementation of Financial Provisions of the United Nations 
Security Council Resolutions to Counter the Proliferation of Weapons 
of Mass Destruction,'' September 5, 2007 (http://www.fatf-gafi.org/dataoecd/23/16/39318680.pdf).
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    The FATF has been particularly concerned with Iran's failure to 
address the risk of terrorist financing, and starting in February 2009, 
the FATF called upon its members and urged all jurisdictions to apply 
effective counter-measures to protect their financial sectors from the 
terrorist financing risks emanating from Iran.\18\ In addition, the 
FATF advised jurisdictions to protect correspondent relationships from 
being used to bypass or evade counter-measures and risk mitigation 
practices, and to take into account money laundering and financing of 
terrorism risks when considering requests by Iranian financial 
institutions to open branches and subsidiaries in their 
jurisdictions.\19\ The FATF also called on its members and other 
jurisdictions to advise their financial institutions to give special 
attention to business relationships and transactions with Iran, 
including Iranian companies and financial institutions.\20\ Over the 
past three years, the FATF has repeatedly reiterated these concerns and 
reaffirmed its call for FATF-member countries and all jurisdictions to 
implement countermeasures to protect the international financial system 
from the terrorist financing risk emanating from Iran. In response, 
numerous countries, including all G7 countries, have issued advisories 
to their financial institutions.\21\
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    \18\ See ``FATF Statement on Iran,'' The Financial Action Task 
Force, February 25, 2009 (http://www.fatf-gafi.org/dataoecd/18/28/42242615.pdf).
    \19\ Id.
    \20\ Id.
    \21\ See ``Circular 13/2008 (GW)--Statement of the FATF of 16 
October 2008,'' November 7, 2008 (http://www.bafin.de/cln_171/nn_721228/SharedDocs/Veroeffentlichungen/EN/Service/Circulars/rs_0813_gw.html?_nnn=true); ``February 27, 2009 FINTRAC Advisory,'' 
February 27, 2009 (http://www.fintrac-canafe.gc.ca/publications/avs/2009-02-27-eng.asp); ``HM Treasury warns businesses of serious 
threats posed to the international financial system,'' March 11, 
2009 (http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/press_26_09.htm); ``Letter from French Minister of 
Economy,'' (http://www2.economie.gouv.fr/directions_services/dgtpe/sanctions/sanctionsiran.php); and ``Bank of Italy Circular,'' 
(http://www.dt.tesoro.it/it/prevenzione_reati_finanziari/).
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    The FATF's most recent statement in October 2011 reiterated, with a 
renewed urgency, its concern regarding Iran's failure to address the 
risk of terrorist financing and the serious threat this poses to the 
integrity to the international financial system.\22\ The FATF 
reaffirmed its February 2009 call to apply effective countermeasures to 
protect their financial sectors from ML/FT risks emanating from Iran, 
and further called upon its members to consider the steps already taken 
and possible additional safeguards or strengthen existing ones.\23\ In 
addition, the FATF stated that, if Iran fails to take concrete steps to 
improve its AML/CFT regime, the FATF will consider calling on its 
members and urging all jurisdictions to strengthen countermeasures in 
February 2012.\24\ The numerous calls by the FATF for Iran to urgently 
address its terrorist financing vulnerability, coupled with the 
extensive record of Iranian entities using the financial system to 
finance terrorism, proliferation activities, and other illicit 
activity,\25\ raises significant concern over the willingness or 
ability of Iran to establish adequate controls to counter terrorist 
financing.
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    \22\ See ``FATF Public Statement,'' The Financial Action Task 
Force, October 28, 2011 (http://www.fatf-gafi.org/document/55/0,3746,en_32250379_32236992_48966519_1_1_1_1,00.html).
    \23\ Id.
    \24\ Id.
    \25\ ``Update on the Continuing Illicit Finance Threat Emanating 
From Iran,'' FinCEN, June 22, 2010 (http://www.fincen.gov/statutes_regs/guidance/html/fin-2010-a008.html).
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    Although none of these actions to sanction Iran prohibit domestic 
financial institutions and agencies from opening or maintaining a 
correspondent account for or on behalf of any financial institution in 
Iran, or require the type of special due diligence outlined in this 
proposed rulemaking, FinCEN encourages other countries or multilateral 
groups to take similar action based on the findings contained in this 
rulemaking.

2. Whether the Imposition of the Fifth Special Measure Would Create a 
Significant Competitive Disadvantage, Including Any Undue Cost or 
Burden Associated With Compliance, for Financial Institutions Organized 
or Licensed in the United States

    The fifth special measure sought to be imposed by this rulemaking 
would prohibit covered financial institutions from opening and 
maintaining correspondent accounts for, or on behalf of, Iranian 
banking institutions. As a corollary to this measure, covered financial 
institutions also would be required to take reasonable steps to apply 
special due diligence, as set forth below, to all of their 
correspondent accounts to help ensure that no such account is being 
used indirectly to provide services to an Iranian banking institution. 
FinCEN does not expect the burden associated with these requirements to 
be significant given that U.S. financial institutions have long been 
subject to sanctions regulations prohibiting the provision of 
correspondent account services for banking institutions in Iran. There 
is a minimal burden involved in transmitting a one-time notice to 
certain correspondent account holders concerning the prohibition on 
indirectly providing services to Iranian banking institutions. In 
addition, U.S. financial

[[Page 72881]]

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 
(OFAC) of the Department of the Treasury. As explained in more detail 
in the section-by-section analysis below, financial institutions 
should, if necessary, be able to easily adapt their current screening 
procedures to comply with this special measure. Thus, the special due 
diligence that would be required by this rulemaking is not expected to 
impose a significant additional burden upon U.S. financial 
institutions.

3. The Extent To Which the Proposed Action or Timing of the Action Will 
Have a Significant Adverse Systemic Impact on the International 
Payment, Clearance, and Settlement System, or on Legitimate Business 
Activities of Iran

    Banking institutions in Iran generally are not major participants 
in the international payment system and are not relied upon by the 
international banking community for clearance or settlement services. 
Additionally, given the preexisting OFAC and international sanctions on 
Iran and certain Iranian banking institutions, it is unlikely that 
these new measures or the timing of the new measures will have a 
significant impact on the international payment, clearance, and 
settlement system. Financial transactions between the United States and 
Iran pertaining to licensed agricultural and medical exports to Iran, 
as well as other licensed transactions or transactions exempted or not 
prohibited from the scope of OFAC sanctions, may continue under the 
rule as proposed.\26\ Legitimate pre-existing personal investments held 
by Iranian residents in the United States that do not involve Iranian 
banking institutions will be unaffected. Consequently, in light of the 
reasons for imposing this special measure, FinCEN does not believe that 
it will impose an undue burden on legitimate business activities.
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    \26\ For a more complete discussion of prohibited and non-
prohibited transactions, see http://www.treas.gov/ofac.
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4. The Effect of the Proposed Action on United States National Security 
and Foreign Policy

    The exclusion from the U.S. financial system of jurisdictions that 
serve as conduits for significant money laundering activity, for the 
financing of terrorism or weapons of mass destruction or their delivery 
systems, and for other financial crimes enhances U.S. national security 
by making it more difficult for terrorists and money launderers to 
access the substantial resources of the U.S. financial system. To the 
extent that this action serves as an additional tool in preventing Iran 
from accessing the U.S. financial system, the proposed action supports 
and upholds U.S. national security and foreign policy goals. More 
generally, the imposition of the fifth special measure would complement 
the U.S. Government's worldwide efforts to expose and disrupt 
international money laundering and terrorist financing.
    Therefore, pursuant to the finding of the Director of FinCEN that 
Iran is a jurisdiction of primary money laundering concern, and after 
conducting the required consultations and weighing the relevant 
factors, FinCEN has determined that reasonable grounds exist for 
imposing the fifth special measure authorized by 31 U.S.C. 5318A(b)(5) 
against Iran.

III. Section-by-Section Analysis

    The proposed rule would prohibit covered financial institutions 
from establishing, maintaining, or managing in the United States any 
correspondent account for, or on behalf of, banking institutions in 
Iran. 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 improper indirect use by 
Iranian banking institutions. At a minimum, that special due diligence 
must include two elements. First, a covered financial institution must 
notify those correspondent account holders that the covered financial 
institution knows or has reason to know provide services to Iranian 
banking institutions, that such correspondents may not provide Iranian 
banking institutions 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 Iranian banking 
institutions, 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 should take a risk-based approach when deciding what, if 
any, additional due diligence measures it should adopt to guard against 
the improper indirect use of its correspondent accounts by Iranian 
banking institutions, based on risk factors such as the type of 
services it offers and the geographic locations of its correspondents.

A. 1010.657(a)--Definitions

1. Correspondent Account
    Section 1010.657(a)(1) defines the term ``correspondent account'' 
by reference to the definition contained in 31 CFR 1010.605(c)(1)(ii). 
Section 1010.605(c)(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 
includes most types of banking relationships between a U.S. depository 
institution and a foreign bank that are established to provide regular 
services, dealings, and other financial transactions including demand 
deposit, savings deposit, or other transaction or asset accounts, and 
credit accounts or other extensions of credit.\27\
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    \27\ See 31 CFR 1010.605(c)(2)(i)(A)-(B).
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    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 was established 
in the final rule implementing section 312 of the USA PATRIOT Act.\28\
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    \28\ See 31 CFR 1010.605(c)(2)(ii)-(iv).
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2. Covered Financial Institution
    Section 1010.657(a)(2) of the proposed rule defines ``covered 
financial institution'' with the same definition used in the final rule 
implementing section 312 of the USA PATRIOT Act,\29\ which in general 
includes the following:
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    \29\ See 31 CFR 1010.605(f)(1)-(2).
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     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 credit union;
     A savings association;
     A corporation acting under section 25A of the Federal 
Reserve Act (12 U.S.C. 611);
     A trust bank or trust company that is federally regulated 
and is subject to an anti-money laundering program requirements;
     A broker or dealer in securities registered, or required 
to be registered,

[[Page 72882]]

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;
     A private banker; and
     A mutual fund.
3. Iranian Banking Institution
    Section 1010.657(a)(3) of the proposed rule defines a foreign bank 
as that term is defined in 1010.100(u). An Iranian banking institution 
shall mean any foreign bank chartered by Iran, including any branches, 
offices, or subsidiaries of such bank operating in any jurisdiction, 
and any branch or office within Iran of any foreign bank licensed by 
Iran. In addition, the Central Bank of Iran (Bank Markazi Iran),\30\ as 
well as any foreign bank of which more than 50 percent of the voting 
stock or analogous interest is owned by two or more foreign banks 
chartered by Iran, shall be considered an Iranian banking institution. 
For purposes of this rule, a subsidiary shall mean a company of which 
more than 50 percent of the voting stock or analogous interest is 
directly or indirectly owned by another company.
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    \30\ Prior regulations that have applied Section 311 special 
measures to jurisdictions of primary money laundering concern have 
not included the jurisdiction's central bank within the scope of the 
regulation. However, in the case of the Islamic Republic of Iran, 
this inclusion is justified due to the deceptive practices the 
Central Bank of Iran engages in and encourages among Iranian state-
owned banks. This behavior is discussed in the notice of finding 
that the Islamic Republic of Iran is a jurisdiction of primary money 
laundering concern published elsewhere today in the Federal 
Register. See footnote 5, supra.
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    A covered financial institution should take commercially reasonable 
measures to determine whether it maintains a correspondent account for 
an Iranian banking institution, including a branch, office, or 
subsidiary of an Iranian banking institution.

B. 1010.657(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, Iranian banking institutions, 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 
fraud or other fraud or loss based on misidentification of a person's 
status.
1. Prohibition on Direct Use of Correspondent Accounts
    Section 1010.657(b)(1) of the proposed rule requires all covered 
financial institutions to terminate any correspondent account that is 
established, maintained, administered, or managed in the United States 
for, or on behalf of, Iranian banking institutions, provided that the 
account is not blocked under any Executive Order issued pursuant to the 
International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) 
(IEEPA) or under 31 CFR Chapter V. 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, an 
Iranian banking institution.
2. Special Due Diligence of Correspondent Accounts To Prohibit Improper 
Indirect Use
    As a corollary to the prohibition on maintaining correspondent 
accounts directly for Iranian banking institutions, proposed section 
1010.657(b)(2) requires a covered financial institution to apply 
special due diligence to its correspondent accounts \31\ that is 
reasonably designed to guard against their improper indirect use by 
Iranian banking institutions. At a minimum, that special due diligence 
must include notifying those correspondent account holders that the 
covered financial institution knows or has reason to know provide 
services to Iranian banking institutions, that such correspondents 
generally may not provide Iranian banking institutions with access to 
the correspondent account maintained at the covered financial 
institution. A covered financial institution would, for example, have 
knowledge that the correspondents provide such access to Iranian 
banking institutions through transaction screening software or through 
the processing of Iranian transactions under OFAC licenses. A covered 
financial institution may satisfy this requirement by transmitting the 
following notice to its correspondent account holders that it knows or 
has reason to know provide services to Iranian banking institutions:
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    \31\ 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 1010.657, we are prohibited from 
establishing, maintaining, administering or managing a correspondent 
account for, or on behalf of, an Iranian banking institution or any 
of its subsidiaries. The regulations also require us to notify you 
that you may not provide an Iranian banking institution or any of 
its subsidiaries with access to the correspondent account you hold 
at our financial institution other than for the purpose of 
processing transactions that are authorized, exempt, or not 
prohibited pursuant to any Executive Order issued under the 
International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) 
or 31 C.F.R. Chapter V. If we become aware that an Iranian banking 
institution or any of its subsidiaries is indirectly using the 
correspondent account you hold at our financial institution for 
transactions other than those specified above, we will be required 
to take appropriate steps to prevent such access, including 
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terminating your account.

    The purpose of the notice requirement is to help ensure cooperation 
from correspondent account holders in denying Iranian banking 
institutions access to the U.S. financial system. However, FinCEN does 
not require or expect a covered financial institution to obtain a 
certification from any of 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 email to certain of the covered financial 
institution's correspondent account customers, informing them that they 
may not provide Iranian banking institutions 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 those correspondent account holders. 
FinCEN specifically solicits comments on the form and scope of the 
notice that would be required under the rule. FinCEN also requests 
comment as to whether a one-time notice will be sufficient to ensure 
cooperation from correspondent account holders in denying Iranian 
banking institutions access to the financial system, as well as the 
incremental costs that financial institutions would incur if this rule 
required an annual notice.
    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 Iranian

[[Page 72883]]

banking institutions, 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 an Iranian banking institution as the originator's 
or beneficiary's financial institution, or otherwise referenced an 
Iranian banking institution in a manner detectable under the financial 
institution's normal screening processes. An appropriate screening 
mechanism could be the mechanism used by a covered financial 
institution to comply with various legal requirements, such as the 
commercially available software programs used to comply with the 
economic sanctions programs administered by OFAC. FinCEN specifically 
solicits comments on the requirement under the proposed rule that 
covered financial institutions take reasonable steps to screen their 
correspondent accounts in order to identify any indirect use of such 
accounts by Iranian banking institutions.
    Notifying certain correspondent account holders and taking 
reasonable steps to identify any indirect use of its correspondent 
accounts by Iranian banking institutions 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 
improper indirect use of its correspondent accounts by Iranian banking 
institutions, 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 an Iranian banking institution must take all 
appropriate steps to prevent such indirect access, including the 
notification of its correspondent account holder per section 
1010.657(b)(2)(i)(A) and, where necessary, terminating the 
correspondent account. However, this provision does not require 
financial institutions to prevent indirect access to correspondent 
accounts when such access is necessary to conduct transactions 
involving Iranian banking institutions that are: (1) Authorized 
pursuant to Executive Orders issued under IEEPA or pursuant to 31 CFR 
Chapter V, including transactions authorized by the Office of Foreign 
Assets Control; (2), exempted from the prohibitions of such authority; 
or (3) not prohibited by such authority.
    A covered financial institution may afford the foreign bank a 
reasonable opportunity to take corrective action prior to terminating 
the correspondent account. Should the foreign bank refuse to comply, or 
if the covered financial institution cannot obtain adequate assurances 
that Iranian banking institutions will no longer be able to improperly 
access the correspondent account, 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 improper indirect access to an Iranian banking institution. 
FinCEN specifically solicits comments on the requirement under the 
proposed rule that covered financial institutions prevent improper 
indirect access to Iranian banking institutions, once such indirect 
access is identified.
3. Reporting Not Required
    Section 1010.657(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 those correspondent 
account holders that the covered financial institution knows or has 
reason to know provide services to Iranian banking institutions, that 
such correspondents may not provide Iranian banking institutions with 
improper 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 Iranian banking institutions, and specifically invites comments on 
the following matters:
    1. The form and scope of the notice to certain correspondent 
account holders that would be required under the rule and whether a 
one-time notice will be sufficient to ensure cooperation from 
correspondent account holders in denying Iranian banking institutions 
access to the financial system, and the incremental costs that 
financial institutions would incur if this rule required an annual 
notice;
    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 Iranian banking institutions;
    3. The appropriate steps a covered financial institution should 
take once it identifies an indirect use of one of its correspondent 
accounts by an Iranian banking institution; and
    4. The impact of the proposed special measure upon legitimate 
transactions with Iran involving, in particular, U.S. persons and 
entities; foreign persons, entities, and governments; and multilateral 
organizations doing legitimate business with persons or entities 
operating in Iran.

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. 
Given that U.S. financial institutions have long been subject to 
sanctions regulations prohibiting the provision of correspondent 
account services for banking institutions in Iran, FinCEN assesses that 
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 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 OFAC, can easily be 
modified to monitor for the use of correspondent accounts by Iranian 
banking institutions. Thus, the special due diligence that would be 
required by this rulemaking--i.e., the one-time transmittal of notice 
to certain correspondent account holders and the screening of 
transactions to identify any indirect use of correspondent accounts, 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

[[Page 72884]]

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 to the Desk Officer for the Department of Treasury, 
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Paperwork Reduction Project (1506), Washington, DC 20503 (or by 
email to [email protected]) with a copy to FinCEN by mail or 
email at the addresses previously specified. Comments should be 
submitted by one method only. Comments on the collection of information 
should be received by January 27, 2012. 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 part 1320, the 
following information concerning the collection of information as 
required by 31 CFR 1010.657 is presented to assist those persons 
wishing to comment on the information collection.
    The collection of information in this proposed rule is in 
1010.657(b)(2)(i) and 1010.657(b)(3)(i). The notification requirement 
in 1010.657(b)(2)(i) is intended to ensure cooperation from 
correspondent account holders in denying Iranian banking institutions 
access to the U.S. financial system. The information required to be 
maintained by 1010.657(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 1010.657. The 
class of financial institutions affected by the notification 
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 one 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

    The proposed rule is not a significant regulatory action for 
purposes of Executive Order 12866, ``Regulatory Planning and Review.''

List of Subjects in 31 CFR Chapter X

    Administrative practice and procedure, Banks and banking, Brokers, 
Counter-money laundering, Counter-terrorism, Foreign banking, Iran.

Authority and Issuance

    For the reasons set forth in the preamble, chapter X of title 31 of 
the Code of Federal Regulations is proposed to be amended as follows:

Chapter X--Financial Recordkeeping and Reporting of Currency and 
Financial Transactions

    1. The authority citation for chapter X is amended to read as 
follows:

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

    2. Subpart F of Chapter X is amended by adding new Sec.  1010.657 
under the undesignated center heading ``SPECIAL DUE DILIGENCE FOR 
CORRESPONDENT ACCOUNTS AND PRIVATE BANKING ACCOUNTS'' to read as 
follows:


Sec.  1010.657  Special measures against the Islamic Republic of Iran.

    (a) Definitions. For purposes of this section:
    (1) Correspondent account has the same meaning as provided in Sec.  
1010.605(c)(1)(ii).
    (2) Covered financial institution has the same meaning as provided 
in Sec.  1010.605(f)(1)-(2).
    (3) Foreign bank has the same meaning as 1010.100(u).
    (4) Iranian banking institution means the following:
    (i) Any foreign bank chartered by Iran, including any branches, 
offices, or subsidiaries of such bank operating in any jurisdiction, 
and any branch or office within Iran of any foreign bank licensed by 
Iran;
    (ii) The Central Bank of Iran (Bank Markazi Iran); and
    (iii) Any foreign bank of which more than 50 percent of the voting 
stock or analogous interest is owned by two or more foreign banks 
chartered by Iran.
    (5) Subsidiary means a company of which more than 50 percent of the 
voting stock or analogous 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, an Iranian banking institution, provided that the 
account is not blocked under any Executive Order issued pursuant to the 
International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) 
(IEEPA) or under 31 CFR Chapter V.
    (2) Special due diligence of correspondent accounts to prohibit 
improper indirect use.
    (i) A covered financial institution shall apply special due 
diligence to its correspondent accounts that is reasonably designed to 
guard against their improper indirect use by Iranian banking 
institutions. At a minimum, that special due diligence must include:
    (A) Notifying those correspondent account holders that the covered 
financial institution knows or has reason to know provide services to 
Iranian banking institutions, that such correspondents generally may 
not provide Iranian banking institutions 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 Iranian banking institutions, 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, other due diligence measures it 
should adopt to guard against the improper indirect use of its 
correspondent accounts by Iranian banking institutions.
    (iii) A covered financial institution that obtains knowledge that a 
correspondent account is being used by the foreign bank to provide 
indirect access to an Iranian banking institution, shall take all 
appropriate steps to prevent such indirect access, including the 
notification of its correspondent account holder under paragraph

[[Page 72885]]

(b)(2)(i)(A) of this section and, where necessary, terminating the 
correspondent account, except to the extent that such indirect access 
to the correspondent accounts is necessary to conduct transactions 
involving Iranian banking institutions that are: (1) Authorized 
pursuant to Executive Orders issued under IEEPA or pursuant to 31 CFR 
Chapter V, including transactions authorized by the Office of Foreign 
Assets Control; (2), exempted from the prohibitions of such authority; 
or (3) not prohibited by such authority.
    (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: November 18, 2011.
James H. Freis, Jr.,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2011-30331 Filed 11-25-11; 8:45 am]
BILLING CODE 4810-02-P