[Federal Register Volume 80, Number 145 (Wednesday, July 29, 2015)]
[Rules and Regulations]
[Pages 45057-45065]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-18552]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Financial Crimes Enforcement Network

31 CFR Part 1010

RIN 1506-AB27


Imposition of Special Measure Against FBME Bank Ltd., Formerly 
Known as the Federal Bank of the Middle East Ltd., as a Financial 
Institution of Primary Money Laundering Concern

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: In a Notice of Finding (NOF) published in the Federal Register 
on July 22, 2014, the Director of FinCEN found that reasonable grounds 
exist for concluding that FBME Bank Ltd. (FBME), formerly known as the 
Federal Bank of the Middle East, Ltd., is a financial institution of 
primary money laundering concern pursuant to the United States Code 
(U.S.C.). On the same date, FinCEN also published in the Federal 
Register a Notice of Proposed Rulemaking (NPRM) to propose the 
imposition of a special measure authorized by the U.S.C. against FBME. 
FinCEN is issuing this final rule imposing the fifth special measure 
against FBME.

DATES: This final rule is effective August 28, 2015.

FOR FURTHER INFORMATION CONTACT: The FinCEN Resource Center at (800) 
767-2825.

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 (the 
USA PATRIOT Act). Title III of the USA PATRIOT Act amends the anti-
money laundering provisions of the Bank Secrecy Act (BSA), codified at 
12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314, 5316-
5332, to promote the prevention, detection, and prosecution of 
international money laundering and the financing of terrorism. 
Regulations implementing the BSA appear at 31 CFR 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.
    Section 311 of the USA PATRIOT Act (Section 311), codified at 31 
U.S.C. 5318A, grants the Director of FinCEN the authority, upon finding 
that reasonable grounds exist for concluding that a foreign 
jurisdiction, financial 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'' to address the primary money laundering concern. This 
rulemaking imposes the fifth special measure, codified at 31 U.S.C. 
5318A(b)(5), against FBME. The fifth special measure allows the 
Director to prohibit or impose conditions on the opening or maintaining 
of

[[Page 45058]]

correspondent or payable-through accounts for the identified 
institution by U.S. financial institutions.

B. FBME

    FBME was established in 1982 in Cyprus as the Federal Bank of the 
Middle East, Ltd., a subsidiary of the private Lebanese bank, the 
Federal Bank of Lebanon. Both FBME and the Federal Bank of Lebanon are 
owned by Ayoub-Farid M. Saab and Fadi M. Saab. In 1986, FBME changed 
its country of incorporation to the Cayman Islands, and its banking 
presence in Cyprus was re-registered as a branch of the Cayman Islands 
entity. In 2003, FBME left the Cayman Islands and incorporated and 
established its headquarters in Tanzania. At the same time, FBME's 
Cypriot operations became a branch of FBME Tanzania Ltd. In 2005, FBME 
changed its name from the Federal Bank of the Middle East, Ltd. to FBME 
Bank Ltd.
    FBME's headquarters in Tanzania is widely regarded as the largest 
bank in Tanzania based on its $2 billion asset size, but it has only 
four Tanzania-based branches. While FBME is presently headquartered in 
Tanzania, FBME transacts over 90 percent of its global banking business 
and holds over 90 percent of its assets in its Cyprus branch. FBME has 
always maintained a significant presence in Cyprus. FBME has stated, 
however, that it is not in direct competition with local retail banks 
in Cyprus for several reasons, including that it does not issue checks, 
it has no retail counters there, and its Cypriot customers are limited 
mainly to staff, contractors, and professionals providing services to 
FBME.

II. The 2014 Finding and Subsequent Developments

A. The 2014 Finding

    In a NOF published in the Federal Register on July 22, 2014, the 
Director of FinCEN explained her finding that reasonable grounds exist 
for concluding that FBME is a financial institution of primary money 
laundering concern pursuant to 31 U.S.C. 5318A.\1\ FinCEN's NOF 
identified two main areas of concern: (1) FBME's facilitation of money 
laundering, terrorist financing, transnational organized crime, fraud 
schemes, sanctions evasion, weapons proliferation, corruption by 
politically-exposed persons, and other financial crime, and (2) FBME's 
weak anti-money laundering (AML) controls, which allow its customers to 
perform a significant volume of obscured transactions and activities 
through the U.S. financial system. In particular, the Director found 
that FBME is used to facilitate money laundering, terrorist financing, 
transnational organized crime, fraud, sanctions evasion, and other 
illicit activity internationally and through the U.S. financial system 
and has systemic failures in its AML controls that attract high-risk 
shell companies (i.e., companies formed for the sole purpose of holding 
property or funds and that do not engage in any legitimate business 
activity). FBME performs a significant volume of transactions and 
activities that have little or no transparency and often no apparent 
legitimate business purpose.
---------------------------------------------------------------------------

    \1\ See 79 FR 42639 (July 22, 2014).
---------------------------------------------------------------------------

    As detailed in the NOF, these activities have included (1) an FBME 
customer receiving a deposit of hundreds of thousands of dollars from a 
financier for Lebanese Hezbollah; (2) providing financial services to a 
financial advisor for a major transnational organized crime figure; (3) 
FBME's facilitation of the transfers to an FBME account involved in 
fraud against a U.S. person, with the FBME customer operating the 
alleged fraud scheme later being indicted in the United States District 
Court for the Northern District of Ohio; and (4) FBME's facilitation of 
U.S. sanctions evasion through its extensive customer base of shell 
companies, including at least one FBME customer that was a front 
company for a U.S.-sanctioned Syrian entity, the Scientific Studies and 
Research Center (SSRC) and which used its FBME account to process 
transactions through the U.S. financial system.
    On the same date it published the NOF, FinCEN also published in the 
Federal Register a related NPRM to propose the imposition of the fifth 
special measure against FBME and to seek comment.\2\
---------------------------------------------------------------------------

    \2\ See 79 FR 42486 (July 22, 2014) (RIN 1506-AB27).
---------------------------------------------------------------------------

B. FBME Subsequent Developments

    On July 21, 2014, the Central Bank of Cyprus (CBC) issued a decree 
announcing that it would formally place FBME's Cyprus branch ``under 
resolution,'' allowing the CBC to take numerous unilateral measures to 
protect FBME's depositors. On July 24, 2014, the Bank of Tanzania took 
over management of FBME's headquarters in Tanzania because of the 
potential effects of the CBC's actions on the Tanzanian banking system.
    After considering all relevant comments and other information 
available to the agency, including both public and non-public 
reporting, FinCEN is issuing this final rule imposing the fifth special 
measure against FBME, which prohibits the opening or maintaining of 
correspondent or payable-through accounts for FBME by U.S. financial 
institutions. This information continues to provide reason to believe 
that FBME's AML compliance efforts are not adequate to address the 
risks faced by FBME, and that FBME facilitates illicit financial 
activity. As described below, audits performed by third parties in 2013 
and 2014 that were provided to FinCEN by FBME to demonstrate the 
effectiveness of its AML compliance program instead identified 
significant, recurring weaknesses in FBME's compliance program. Several 
deficiencies were identified by one of the third party auditors as 
being of ``high or medium significance.'' These deficiencies, which 
FinCEN has reason to believe continue to exist following the issuance 
of the NOF, facilitate the illicit financial activities of FBME's 
customers.

III. FBME's September 22, 2014 Comment and Other Comments

    FBME, through outside counsel, submitted comments, dated September 
22, 2014, during the comment period. FBME made six additional 
submissions of information related to comments made during the comment 
period after the close of the comment period. FBME's September 22, 
2014, comments were received during the comment period and accordingly 
made a part of the public record. The six additional submissions were 
not made a part of the public record, based in part on FBME's claim 
that these additional submissions contained sensitive commercial and 
business information and FBME's corresponding request that the 
additional submissions be afforded confidential treatment. However, 
FinCEN reviewed and considered each of these submissions in drafting 
this final rule.
    FBME's September 22, 2014 comment consists of an introduction 
followed by two major sections. In its introduction, FBME makes six key 
points. First, FBME states that its AML compliance program policies are 
in line with applicable requirements, including the requirements of the 
European Union's Third Money Laundering Directive and the CBC's Fourth 
Directive. FBME contends that this alignment has been the case since at 
least 2013, according to third party audits. Second, FBME states that, 
in response to recommendations made as a result of audits conducted by 
Ernst & Young (EY) in 2011 and KPMG in 2013, FBME has

[[Page 45059]]

substantially strengthened its compliance program over the last two 
years. Third, FBME states that FBME and its officers and directors do 
not condone the use of FBME for illicit purposes and strive to prevent 
such misuse. Fourth, FBME contends that some of the statements made in 
the NOF are incorrect or are based on incomplete information, which 
FBME also describes in the second section of its comment. Fifth, FBME 
states that, in some cases, FBME filed Suspicious Transaction Reports 
(STRs) with the Cypriot Financial Intelligence Unit (MOKAS) on activity 
described in the NOF and NPRM. Sixth, FBME claims that the NOF and NPRM 
have had a significant adverse impact on FBME and its customers.
    The first section of FBME's September 22, 2014 comment then 
describes aspects of its AML compliance program, and the second section 
responds to statements made in the NOF that FBME asserts are inaccurate 
or based on incomplete information.
    In this final rule, FinCEN is focusing its response on the six 
points in the introduction, which summarize FBME's concerns with the 
NOF and the NPRM. In responding to the first three points of FBME's 
introduction, FinCEN also refutes the first section of FBME's comment 
because the first three points of FBME's introduction and the first 
section of FBME's comment all refer to FBME's AML compliance program, 
its policies, audits conducted by third parties, and FBME's management. 
In responding to the fourth point of FBME's introduction, FinCEN is 
also addressing the second section of FBME's comment because both the 
fourth point of the introduction and the second section of the comment 
refer to the same statements in the NOF that FBME asserts are 
inaccurate or based on incomplete information.
    With regard to FBME's first and second points, the information 
provided by FBME on the audits conducted by KPMG and EY in 2013 and 
2014, respectively, show a pattern of recurring AML deficiencies at the 
bank. These included failures to maintain adequate customer 
identification files, along with other customer due diligence 
weaknesses, failure to ensure that third parties the bank relied on to 
establish new customer relationships employed appropriate AML controls 
with regard to such persons, and issues with sanctions-related 
screening.
    According to FBME's comment, EY conducted an audit in 2011 (the 
2011 EY Audit). During that audit, according to FBME, EY found that 
FBME's due diligence procedures with respect to obtaining information 
from new clients met the requirements of the CBC Directive at the time, 
but also noted that some customer information requirements of the 
Directive had not been fully met by FBME in previous iterations of its 
AML procedures and policies. According to FBME's comment, EY 
subsequently conducted another audit in 2014 (the 2014 EY Audit), which 
found that, although FBME had an AML compliance program in place that 
incorporated the requirements of both the CBC Fourth Directive and the 
European Union Third Directive, FBME nevertheless had deficiencies in 
its customer due diligence, automated alerts system, and AML training 
areas.
    According to FBME's September 22, 2014 comment, KPMG also conducted 
an audit in 2013 (the 2013 KPMG Audit) which found that FBME 
``basically fulfills'' its AML regulatory requirements set forth by the 
CBC and the European Union, but also identified issues of ``high or 
medium'' significance with FBME's use of Approved Third Parties and 
FBME's sanction screening procedures. As FBME stated in its September 
22, 2014 comment, FBME uses its relationships with Approved Third 
Parties, some of which are in foreign jurisdictions, to develop 
potential new customer relationships. According to the KPMG 2013 Audit, 
FBME had never attempted to ensure the adequacy of its Approved Third 
Parties' AML measures. In addition, the 2013 KPMG Audit found that FBME 
only screened the related parties of its Approved Third Parties when 
the customers were initially onboarded.
    The 2013 KPMG Audit also found FBME's customer due diligence 
deficient. As FBME disclosed in its September 22, 2014 comment, in its 
2013 audit, KPMG ``recommended better presentation of ownership 
information to demonstrate links between group entities for older 
customers, in line with a new structure that had been introduced for 
new customers. KPMG also found that certain customer files reviewed did 
not have sufficient information to gain a complete understanding of the 
customers' activities or business rationale.'' In its 2013 audit, KPMG 
further found that FBME's use of hold-mail accounts and post office 
boxes managed by Approved Third Parties should be reconsidered by FBME 
in order to ``avoid potential anonymisation.''
    The 2014 EY Audit identified numerous deficiencies in FBME's 
compliance program. Specifically, the 2014 EY Audit found that the 
following recommendations were necessary for FBME's compliance program: 
Consistently documenting the efforts taken to verify the sources of 
funds and business purpose of accounts from prospective customers; more 
thoroughly investigating relationships among FBME customers, especially 
when inordinate volumes of internal transfers are identified; modifying 
FBME's periodic customer due diligence process to align with industry 
practices (e.g., moving to a rolling 12 or 36-month review cycle, 
depending on the customer's risk); implementing an automated case 
management system to record the alerts generated, stage of 
investigation, and ultimate disposition of the alerts generated by 
FBME's screening software, as opposed to the current process of 
manually entering the alerts/outcome on several different spreadsheets; 
and more thoroughly documenting the AML/sanctions training given for 
new hires and providing general awareness training to all employees on 
an annual basis.
    The numerous AML compliance program deficiencies described in the 
2013 KPMG Audit and the 2014 EY Audit in particular are similar to AML 
deficiencies FinCEN identified in the NOF. All of these findings follow 
action against FBME by the CBC for similar issues. As FBME acknowledged 
in its September 22, 2014 comment, in 2010, the CBC fined FBME 80,000 
euros for customer identification, due diligence, and automated 
monitoring deficiencies. According to the 2013 KPMG Audit, FBME also 
undertook an extensive Know Your Customer (KYC) remediation project 
from 2009 through 2011 that was ordered by the CBC and resulted in the 
closure of thousands of FBME accounts.
    Finally, FBME's argument that its AML compliance program is now 
adequate is weakened by the list of illicit actors identified in the 
NOF that have continued to make use of FBME as recently as 2014, 
including narcotics traffickers, terrorist financiers, and organized 
crime figures.
    With regard to FBME's third point, information available to FinCEN 
makes it reasonable to conclude that FBME's management facilitated, 
either actively or passively, the illicit activities of its customers, 
as FinCEN set forth in the NOF.
    With regard to FBME's fourth point, in which FBME has argued that 
portions of the eight statements in the NOF were incorrect or based on 
incomplete information, FinCEN believes that it is appropriate in two 
cases to amend the NOF based on these comments. In the first case, FBME 
stated that it was not

[[Page 45060]]

fined by the CBC in 2008, but that the CBC imposed an administrative 
fine on FBME in 2010. FinCEN agrees that the fine in question was 
imposed in 2010, not in 2008.
    In the second case, FBME argued that the report that FBME may be 
subject to a fine of up to 240 million euros is from a November 2013 
article in the Cypriot press that relied on anonymous sources at the 
CBC. FinCEN agrees that the source of this statement was an article 
that appeared in the Cypriot press that referenced statements by a CBC 
official speaking anonymously. Neither these two cases nor any of 
FBME's remaining claims of incompleteness and factual inaccuracy 
presents any new information or in any way cause FinCEN to doubt the 
accuracy of the information presented in the NOF.
    With regard to FBME's fifth point, FinCEN notes that the filing of 
STRs on suspicious activities or transactions by a financial 
institution is not, taken in isolation, an adequate indicator of the 
robustness and comprehensiveness of a compliance program. Although the 
filing of STRs is a critical component of any financial institution's 
AML compliance program, if STRs are filed in an incomplete, inaccurate, 
or untimely manner, their usefulness to authorities responsible for 
investigating money laundering and other illicit activities is greatly 
diminished. Moreover, filing STRs does not excuse a financial 
institution's failure to adequately implement other areas of its AML 
program, such as, for example, customer due diligence procedures.
    With regard to FBME's sixth point, as part of FinCEN's 
consideration of the statutory factors supporting its selection of the 
fifth special measure, FinCEN has considered ``the extent to which the 
action or the timing of the action would have a significant adverse 
systemic impact on . . . legitimate business activities involving'' 
FBME. This is discussed in Part IV, section A below.\3\
---------------------------------------------------------------------------

    \3\ 31 U.S.C. 5318A(a)(4)(B)(iii).
---------------------------------------------------------------------------

    In addition to its public comment, FBME has submitted a substantial 
volume of supplemental information regarding FBME's policies and 
procedures, and reports of the audits conducted by KPMG in 2013 and EY 
in 2014. FinCEN has carefully considered these materials, which outline 
some of the steps that FBME has taken to strengthen its compliance 
program. However, after a thorough review of these materials, FinCEN 
believes that, except as acknowledged above, the statements made in the 
NOF remain true and accurate, and that FBME is of ``primary money 
laundering concern.''
    FinCEN continues to have serious concerns regarding FBME's 
potential to be used wittingly or unwittingly for illicit purposes. As 
FinCEN explained in its NOF, FBME customers continue to exhibit shell 
company attributes and many are located in high-risk jurisdictions. 
FinCEN continues to have concerns with FBME's AML compliance program, 
in particular with the aforementioned customer due diligence 
deficiencies, which were identified over a number of years and which 
enable FBME customers to conduct financial activity in relative 
obscurity.
    FinCEN also considered a comment received from the American 
Bankers' Association (ABA), dated September 22, 2014; a joint comment 
received from the Securities Industry and Financial Markets Association 
(SIFMA) and The Clearing House (TCH), dated September 22, 2014; and a 
separate comment received from SIFMA, dated September 22, 2014. FinCEN 
notes that these comments were procedural in nature and did not address 
the underlying conclusion surrounding the risk of money laundering 
through FBME.
    FinCEN appreciates the thoughtful comments that were submitted and 
has addressed these comments, as appropriate, in the section-by-section 
analysis below.

IV. Imposition of Special Measure Against FBME as a Financial 
Institution of Primary Money Laundering Concern

    As described in the NOF and this final rule, the Director of FinCEN 
found that reasonable grounds exist for concluding that FBME is a 
financial institution of primary money laundering concern. Based upon 
that finding, the Director of FinCEN is authorized to impose one or 
more special measures. Following the required consultations and the 
consideration of all relevant factors discussed in the NOF, the 
Secretary, through the Director of FinCEN, proposed the imposition of 
the fifth special measure in an NPRM published on July 22, 2014. The 
fifth special measure authorizes a prohibition against the opening or 
maintaining of correspondent accounts by any domestic financial 
institution or agency for, or on behalf of, a financial institution 
found to be a primary money laundering concern.
    Consistent with the finding that FBME is a financial institution of 
primary money laundering concern and in consideration of additional 
relevant factors, this final rule imposes the fifth special measure 
with regard to FBME. The prohibition on the maintenance of 
correspondent accounts imposed by the fifth special measure will help 
to guard against the money laundering risks that FBME presents to the 
U.S. financial system as identified in the NOF, NPRM, and this final 
rule.

A. Discussion of Section 311 Factors

    In determining which special measure to implement to address the 
primary money laundering concern posed by FBME, FinCEN has considered 
the following factors.
1. Whether Similar Actions Have Been or Will Be Taken by Other Nations 
or Multilateral Groups Against FBME
    Other countries or multilateral groups have not yet taken action 
similar to those proposed in this rulemaking that would prohibit 
domestic financial institutions and agencies from opening or 
maintaining a correspondent account for, or on behalf of, FBME and that 
would require those domestic financial institutions and agencies to 
screen their correspondents in a manner that is reasonably designed to 
guard against indirect use by FBME, including access through the use of 
nested correspondent accounts held by FBME.
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 imposed by this rulemaking prohibits 
covered financial institutions from opening and maintaining 
correspondent accounts for, or on behalf of, FBME. As a corollary to 
this measure, covered financial institutions also are 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 FBME. FinCEN does not 
expect the burden associated with these requirements to be significant. 
Additionally, there is only a minimal burden involved in transmitting a 
one-time notice to correspondent account holders concerning the 
prohibition on indirectly providing services to FBME. U.S. financial 
institutions generally apply some level of transaction and account 
screening, often through the use of commercially available software. 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 support compliance with this 
final rule. Thus, the prohibition on the maintenance of correspondent 
accounts that would be required by this

[[Page 45061]]

rulemaking is not expected to impose a significant additional burden 
upon U.S. financial institutions.
3. The Extent to Which the 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 
Involving FBME
    FBME is not a major participant in the international payment system 
and is not relied upon by the international banking community for 
clearance or settlement services. Thus, the imposition of the fifth 
special measure against FBME will not have a significant adverse 
systemic impact on the international payment, clearance, and settlement 
system. In light of the underlying money laundering risks posed by 
FBME, FinCEN does not believe that the rule will impose an undue burden 
on legitimate business activities involving FBME. There are other banks 
in both Cyprus and Tanzania that could alleviate potential impact on 
legitimate business activities within those jurisdictions.\4\ On July 
21, 2014, the CBC, under the authority of the Cyprus Resolution Act, 
issued a decree announcing that it would formally place FBME's Cyprus 
branch ``under resolution,'' allowing the CBC to take numerous 
unilateral measures regarding FBME, including selling off Cyprus-based 
FBME branch locations, to protect FBME's depositors. On July 24, 2014, 
the Bank of Tanzania took over management of FBME's headquarters in 
Tanzania because of the potential effects of the CBC's actions on the 
Tanzanian banking system. The control of FBME branches by state 
authorities in both jurisdictions also offers a means to support 
legitimate business activity involving FBME. Finally, FinCEN 
anticipates that its identification of the money laundering risks 
associated with FBME will assist banks in appropriately policing 
legitimate business involving FBME to guard against the use of their 
institutions for financial crime.
---------------------------------------------------------------------------

    \4\ See Central Bank of Cyprus (Web site: http://www.centralbank.gov.cy/) and Bank of Tanzania (Web site: http://www.bot-tz.org/) for lists of banks in Cyprus and Tanzania, 
respectively.
---------------------------------------------------------------------------

4. The Effect of the Action on United States National Security and 
Foreign Policy
    The exclusion from the U.S. financial system of banks that, like 
FBME, serve as conduits for money laundering activity and other 
financial crimes will enhance U.S. national security by making it more 
difficult for terrorists, sanctions evaders, and money launderers to 
access the substantial resources of the U.S. financial system. More 
generally, the imposition of the fifth special measure will complement 
the U.S. Government's worldwide foreign policy efforts to expose and 
disrupt international money laundering, and to encourage other nations 
to do the same. The United States has played a leadership role in 
combating money laundering and terrorist financing not only through 
action with regard to specific institutions but also through 
participation in international operational and standard-setting bodies 
such as the Egmont Group and the Financial Action Task Force.

V. Section-by-Section Analysis for Imposition of the Fifth Special 
Measure

A. 1010.658(a)--Definitions

1. FBME
    Section 1010.658(a)(1) of the rule defines FBME to include all 
branches, offices, and subsidiaries of FBME operating in any 
jurisdiction, including Tanzania and Cyprus. Financial institutions 
should take commercially reasonable measures to determine whether a 
customer is a branch, office, or subsidiary of FBME. Currently, FBME's 
bank branches are located in Tanzania and Cyprus, with a representative 
office in Moscow, Russian Federation.
    SIFMA, TCH, and the ABA noted that it would be useful for FinCEN to 
provide a list of FBME's subsidiaries; however, because subsidiary 
relationships can change frequently, covered financial institutions 
should use commercially-reasonable tools to determine the current 
subsidiaries of FBME.
2. Correspondent Account
    Section 1010.658(a)(2) of the rule 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 
to handle other financial transactions related to the foreign bank. 
Under this definition, ``payable through accounts'' are a type of 
correspondent account.
    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 a 
demand deposit, savings deposit, or other transaction or asset account, 
and a credit account or other extension of credit. FinCEN is using the 
same definition of ``account'' for purposes of this rule as was 
established for depository institutions in the final rule implementing 
the provisions of section 312 of the USA PATRIOT Act requiring enhanced 
due diligence for correspondent accounts maintained for certain foreign 
banks.\5\
---------------------------------------------------------------------------

    \5\ See 31 CFR 1010.605(c)(2)(i).
---------------------------------------------------------------------------

    In the case of securities broker-dealers, futures commission 
merchants, introducing brokers-commodities, and investment companies 
that are open-end companies (mutual funds), FinCEN is also using the 
same definition of ``account'' for purposes of this rule as was 
established for these entities in the final rule implementing the 
provisions of section 312 of the USA PATRIOT Act requiring enhanced due 
diligence for correspondent accounts maintained for certain foreign 
banks.\6\
---------------------------------------------------------------------------

    \6\ See 31 CFR 1010.605(c)(2)(ii)-(iv).
---------------------------------------------------------------------------

3. Covered Financial Institution
    Section 1010.658(a)(3) of the rule defines ``covered financial 
institution'' with the same definition used in the final rule 
implementing section 312 of the USA PATRIOT Act,\7\ which, in general, 
includes the following:
---------------------------------------------------------------------------

    \7\ See 31 CFR 1010.605(e)(1).
---------------------------------------------------------------------------

     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);
     A trust bank or trust company;
     A broker or dealer in securities;
     A futures commission merchant or an introducing broker-
commodities; and
     A mutual fund.
4. Subsidiary
    Section 1010.658(a)(4) of the rule defines ``subsidiary'' as a 
company of which more than 50 percent of the voting stock or analogous 
equity interest is owned by another company.

B. 1010.658(b)--Requirements for Covered Financial Institutions With 
Regard to the Fifth Special Measure

    For purposes of complying with the final rule's prohibition on the 
opening or maintaining in the United States of correspondent accounts 
for, or on behalf of, FBME, covered financial institutions

[[Page 45062]]

should take such steps as 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 Opening or Maintaining Correspondent Accounts
    Section 1010.658(b)(1) of the rule imposing the fifth special 
measure prohibits all covered financial institutions from establishing, 
maintaining, administering, or managing a correspondent account in the 
United States for, or on behalf of, FBME. 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, 
FBME.
2. Special Due Diligence of Correspondent Accounts To Prohibit Indirect 
Use
    As a corollary to the prohibition on maintaining correspondent 
accounts directly for FBME, Sec.  1010.658(b)(2) of the rule imposing 
the fifth special measure requires a covered financial institution to 
apply special due diligence to its correspondent accounts that is 
reasonably designed to guard against processing transactions involving 
FBME. As part of that special due diligence, covered financial 
institutions must notify those foreign correspondent account holders 
that covered financial institutions know or have reason to know provide 
services to FBME that such correspondents may not provide FBME with 
access to the correspondent account maintained at the covered financial 
institution. Covered financial institutions should implement 
appropriate risk-based procedures to identify transactions involving 
FBME.
    A covered financial institution may satisfy the notification 
requirement by transmitting the following notice to its foreign 
correspondent account holders that it knows or has reason to know 
provide services to FBME:

    Notice: Pursuant to U.S. regulations issued under Section 311 of 
the USA PATRIOT Act, see 31 CFR 1010.658, we are prohibited from 
establishing, maintaining, administering, or managing a 
correspondent account for, or on behalf of, FBME Bank, Ltd., or any 
of its branches, offices or subsidiaries. The regulations also 
require us to notify you that you may not provide FBME Bank, Ltd., 
or any of its branches, offices or subsidiaries with access to the 
correspondent account you hold at our financial institution. If we 
become aware that the correspondent account you hold at our 
financial institution has processed any transactions involving FBME 
Bank, Ltd., or any of its branches, offices or subsidiaries, we will 
be required to take appropriate steps to prevent such access, 
including terminating your account.

    A covered financial institution may, for example, have knowledge 
through transaction screening software that a correspondent account 
processes transactions for FBME. The purpose of the notice requirement 
is to aid cooperation with correspondent account holders in preventing 
transactions involving FBME from accessing the U.S. financial system. 
However, FinCEN would not require or expect a covered financial 
institution to obtain a certification from any of its correspondent 
account holders that access will not be provided 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 appropriate correspondent account holders of 
the covered financial institution, informing them that they may not 
provide FBME 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.
    In its comment to the NPRM, SIFMA requested reconsideration of the 
notice provision, specifically regarding the meaning of ``one-time 
notice,'' and further objected to the requirement to send such a notice 
as overly burdensome and possibly duplicative. SIFMA also requested 
further clarification with regard to the timing of the required notice. 
FinCEN emphasizes that the scope of notice requirement is targeted 
toward those correspondent account holders that the covered financial 
institution knows or has reason to know provide services to FBME, not 
to all correspondent account holders. The term ``one-time notice'' 
means that a financial institution should provide notice to all 
existing correspondent account holders who the covered financial 
institution knows or has reason to know provide services to FBME, 
within a reasonably short time after this final rule is published, and 
to new correspondent account holders during the account opening process 
who the covered financial institution knows or has reason to know 
provide services to FBME. It is not necessary for the notice to be 
provided in any particular form. It may be provided electronically, 
orally (with documentation), or as part of the standard paperwork 
involved in opening or maintaining a correspondent account. Given the 
limited nature of FBME's correspondent relationships, FinCEN does not 
expect this requirement to be burdensome.
    A covered financial institution is also required to take reasonable 
steps to identify any indirect use of its correspondent accounts by 
FBME, 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. Covered financial institutions are 
expected to apply an appropriate screening mechanism to be able to 
identify a funds transfer order that on its face lists FBME as the 
financial institution of the originator or beneficiary, or otherwise 
references FBME. 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 the Office of Foreign Assets Control (OFAC).
    Notifying certain correspondent account holders and taking 
reasonable steps to identify any indirect use of its correspondent 
accounts by FBME in the manner discussed above are the minimum due 
diligence requirements under the rule imposing the fifth special 
measure. Beyond these minimum steps, a covered financial institution 
must adopt a risk-based approach for determining what, if any, 
additional due diligence measures are appropriate to guard against the 
risk of indirect use of its correspondent accounts by FBME, based on 
risk factors such as the type of services it offers and the geographic 
locations of its correspondent account holders.
    Under this rule imposing the fifth special measure, a covered 
financial institution that obtains knowledge that a correspondent 
account is being used by a foreign bank to provide indirect access to 
FBME must take all appropriate steps to prevent such indirect access, 
including the notification of its correspondent account holder per 
Sec.  1010.658(b)(2)(i)(A) and, where necessary, terminating the 
correspondent account. A covered financial institution may afford the 
foreign bank a reasonable opportunity to take corrective action prior 
to terminating the correspondent account. Should the foreign bank 
refuse to comply, or if the covered financial institution cannot obtain 
adequate assurances that the account will no longer be available to 
FBME, the covered financial institution must terminate the account 
within a commercially reasonable time. This means that the covered 
financial

[[Page 45063]]

institution may 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 rule if it determines that 
the account will not be used to provide banking services indirectly to 
FBME.
3. Reporting Not Required
    Section 1010.658(b)(3) of the rule imposing the fifth special 
measure 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 
FBME, that such correspondents may not process any transaction 
involving FBME through the correspondent account maintained at the 
covered financial institution.

VI. Regulatory Flexibility Act

    When an agency issues a final rule, the Regulatory Flexibility Act 
(RFA) requires the agency to ``prepare and make available for public 
comment an initial regulatory flexibility analysis'' that will 
``describe the impact of the Final Rule on small entities.'' (5 U.S.C. 
603(a)). Section 605 of the RFA allows an agency to certify a rule, in 
lieu of preparing an analysis, if the final rule is not expected to 
have a significant economic impact on a substantial number of small 
entities.

A. Proposal To Prohibit Covered Financial Institutions From Opening or 
Maintaining Correspondent Accounts With Certain Foreign Banks Under the 
Fifth Special Measure

1. Estimate of the Number of Small Entities to Whom the Proposed Fifth 
Special Measure Will Apply
    For purposes of the RFA, both banks and credit unions are 
considered small entities if they have less than $500,000,000 in 
assets.\8\ Of the estimated 7,000 banks, 80 percent have less than 
$500,000,000 in assets and are considered small entities.\9\ Of the 
estimated 7,000 credit unions, 94 percent have less than $500,000,000 
in assets.\10\
---------------------------------------------------------------------------

    \8\ Table of Small Business Size Standards Matched to North 
American Industry Classification System Codes, Small Business 
Administration Size Standards (SBA Jan. 22, 2014) [hereinafter ``SBA 
Size Standards''].
    \9\ Federal Deposit Insurance Corporation, Find an Institution, 
http://www2.fdic.gov/idasp/main.asp; select Size or Performance: 
Total Assets, type Equal or less than $: ``500000'' and select Find.
    \10\ National Credit Union Administration, Credit Union Data, 
http://webapps.ncua.gov/customquery/ customquery/; select Search Fields: Total 
Assets, select Operator: Less than or equal to, type Field Values: 
``500000000'' and select Go.
---------------------------------------------------------------------------

    Broker-dealers are defined in 31 CFR 1010.100(h) as those broker-
dealers required to register with the Securities and Exchange 
Commission (SEC). Because FinCEN and the SEC regulate substantially the 
same population, for the purposes of the RFA, FinCEN relies on the 
SEC's definition of small business as previously submitted to the Small 
Business Administration (SBA). The SEC has defined the term small 
entity to mean a broker or dealer that: (1) Had total capital (net 
worth plus subordinated liabilities) of less than $500,000 on the date 
in the prior fiscal year as of which its audited financial statements, 
were prepared pursuant to Rule 17a-5(d) or, if not required to file 
such statements, a broker or dealer that had total capital (net worth 
plus subordinated debt) of less than $500,000 on the last business day 
of the preceding fiscal year (or in the time that it has been in 
business if shorter); and (2) is not affiliated with any person (other 
than a natural person) that is not a small business or small 
organization as defined in this release.\11\ Based on SEC estimates, 17 
percent of broker-dealers are classified as small entities for purposes 
of the RFA.\12\
---------------------------------------------------------------------------

    \11\ 17 CFR 240.0-10(c).
    \12\ 76 FR 37572, 37602 (June 27, 2011) (the SEC estimates 871 
small broker-dealers of the 5,063 total registered broker-dealers).
---------------------------------------------------------------------------

    Futures commission merchants (FCMs) are defined in 31 CFR 
1010.100(x) as those FCMs that are registered or required to be 
registered as a FCM with the Commodity Futures Trading Commission 
(CFTC) under the Commodity Exchange Act (CEA), except persons who 
register pursuant to section 4f(a)(2) of the CEA, 7 U.S.C. 6f(a)(2). 
Because FinCEN and the CFTC regulate substantially the same population, 
for the purposes of the RFA, FinCEN relies on the CFTC's definition of 
small business as previously submitted to the SBA. In the CFTC's 
``Policy Statement and Establishment of Definitions of `Small Entities' 
for Purposes of the Regulatory Flexibility Act,'' the CFTC concluded 
that registered FCMs should not be considered to be small entities for 
purposes of the RFA.\13\ The CFTC's determination in this regard was 
based, in part, upon the obligation of registered FCMs to meet the 
capital requirements established by the CFTC.
---------------------------------------------------------------------------

    \13\ 47 FR 18618, 18619 (Apr. 30, 1982).
---------------------------------------------------------------------------

    For purposes of the RFA, an introducing broker-commodities dealer 
is considered small if it has less than $35,500,000 in gross receipts 
annually.\14\ Based on information provided by the National Futures 
Association (NFA), 95 percent of introducing brokers-commodities 
dealers have less than $35.5 million in adjusted net capital and are 
considered to be small entities.
---------------------------------------------------------------------------

    \14\ SBA Size Standards at 28.
---------------------------------------------------------------------------

    Mutual funds are defined in 31 CFR 1010.100(gg) as those investment 
companies that are open-end investment companies that are registered or 
are required to register with the SEC. Because FinCEN and the SEC 
regulate substantially the same population, for the purposes of the 
RFA, FinCEN relies on the SEC's definition of small business as 
previously submitted to the SBA. The SEC has defined the term ``small 
entity'' under the Investment Company Act to mean ``an investment 
company that, together with other investment companies in the same 
group of related investment companies, has net assets of $50 million or 
less as of the end of its most recent fiscal year.'' \15\ Based on SEC 
estimates, seven percent of mutual funds are classified as ``small 
entities'' for purposes of the RFA under this definition.\16\
---------------------------------------------------------------------------

    \15\ 17 CFR 270.0-10.
    \16\ 78 FR 23637, 23658 (April 19, 2013).
---------------------------------------------------------------------------

    As noted above, 80 percent of banks, 94 percent of credit unions, 
17 percent of broker-dealers, 95 percent of introducing brokers-
commodities, no FCMs, and seven percent of mutual funds are small 
entities. The limited number of foreign banking institutions with which 
FBME maintains or will maintain accounts will likely limit the number 
of affected covered financial institutions to the largest U.S. banks, 
which actively engage in international transactions. Thus, the 
prohibition on maintaining correspondent accounts for foreign banking 
institutions that engage in transactions involving FBME under the fifth 
special measure would not impact a substantial number of small 
entities.
2. Description of the Projected Reporting and Recordkeeping 
Requirements of the Fifth Special Measure
    The fifth special measure would require covered financial 
institutions to provide a notification intended to aid cooperation from 
foreign correspondent account holders in preventing transactions 
involving FBME from accessing the U.S. financial system.

[[Page 45064]]

FinCEN estimates that the time it takes institutions to provide this 
notice is one hour. Covered financial institutions would also be 
required to take reasonable measures to detect use of their 
correspondent accounts to process transactions involving FBME. All U.S. 
persons, including U.S. financial institutions, currently must exercise 
some degree of due diligence to comply with OFAC sanctions and 
suspicious activity reporting 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 identify correspondent accounts with foreign banks that 
involve FBME. Thus, the special due diligence that would be required by 
the imposition of the fifth special measure--i.e., the one-time 
transmittal of notice to certain correspondent account holders, the 
screening of transactions to identify any use of correspondent 
accounts, and the implementation of risk-based measures to detect use 
of correspondent accounts--would not impose a significant additional 
economic burden upon small U.S. financial institutions.

B. Certification

    For these reasons, FinCEN certifies that this final rulemaking 
would not have a significant impact on a substantial number of small 
businesses.

VII. Paperwork Reduction Act

    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 has 
been assigned OMB Control Number 1506- AB19. 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.
    Description of Affected Financial Institutions: Banks, broker-
dealers in securities, futures commission merchants and introducing 
brokers-commodities, and mutual funds.
    Estimated Number of Affected Financial Institutions: 5,000.
    Estimated Average Annual Burden in Hours per Affected Financial 
Institution: The estimated average burden associated with the 
collection of information in this rule is one hour per affected 
financial institution.
    Estimated Total Annual Burden: 5,000 hours.

VIII. Executive Order 12866

    Executive Orders 12866 and 13563 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of 
reducing costs, of harmonizing rules, and of promoting flexibility. It 
has been determined that the Final Rule is not a ``significant 
regulatory action'' for purposes of Executive Order 12866.

List of Subjects in 31 CFR Part 1010

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

Authority and Issuance

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

PART 1010--GENERAL PROVISIONS

0
1. The authority citation for part 1010 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 F of chapter X is amended by adding Sec.  1010.658 to read 
as follows:


Sec.  1010.658  Special measures against FBME Bank, Ltd.

    (a) Definitions. For purposes of this section:
    (1) FBME Bank, Ltd. means all branches, offices, and subsidiaries 
of FBME Bank, Ltd. operating in any jurisdiction.
    (2) Correspondent account has the same meaning as provided in Sec.  
1010.605(c)(1)(ii).
    (3) Covered financial institution has the same meaning as provided 
in Sec.  1010.605(e)(1).
    (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) Prohibition on accounts and due diligence requirements for 
covered financial institutions--(1) Prohibition on 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, FBME Bank, Ltd.
    (2) Special due diligence of correspondent accounts to prohibit 
use--(i) A covered financial institution shall apply special due 
diligence to its foreign correspondent accounts that is reasonably 
designed to guard against their use to process transactions involving 
FBME Bank, Ltd. 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 
FBME Bank, Ltd., that such correspondents may not provide FBME Bank, 
Ltd. with access to the correspondent account maintained at the covered 
financial institution; and
    (B) Taking reasonable steps to identify any use of its foreign 
correspondent accounts by FBME Bank, Ltd., to the extent that such 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 
reasonably must adopt to guard against the use of its foreign 
correspondent accounts to process transactions involving FBME Bank, 
Ltd.
    (iii) A covered financial institution that obtains knowledge that a 
foreign correspondent account may be being used to process transactions 
involving FBME Bank, Ltd. shall take all appropriate steps to further 
investigate and prevent such access, including the notification of its 
correspondent account holder under paragraph (b)(2)(i)(A) of this 
section and, where necessary, termination of 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 FBME Bank Ltd.
    (3) Recordkeeping and reporting. (i) A covered financial 
institution is required to document its compliance with the

[[Page 45065]]

notice requirement set forth in paragraph (b)(2)(i)(A) of this section.
    (ii) Nothing in this paragraph (b) shall require a covered 
financial institution to report any information not otherwise required 
to be reported by law or regulation.

    Dated: July 23, 2015.
Jennifer Shasky Calvery,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2015-18552 Filed 7-28-15; 8:45 am]
 BILLING CODE 4810-2P-P